Its ramparts under threat of being breached, troubled WestLB AG has desperately searched for a white knight riding over the horizon. The assault on the regional wholesale bank didn't come from a corporate raider, angry shareholders, the distressed bank's creditors or even German authorities. Rather, the European Commission's Directorate General for Competition insisted Düsseldorf-based WestLB submit a restructuring scheme that ends government control, halves the balance sheet and divests almost all subsidiaries, even if it meant breaking the bank apart. The EC held to a Feb. 15 deadline for the plan, no further delays tolerated.

WestLB submitted its plan at the eleventh hour, but it may not be enough. The bank promised to slash its balance sheet by a third over four years and create four divisions, three for possible sale. Meanwhile, the German government offered its own plan, which would transfer bad assets and sell off the rest.

The restructuring is a general condition the Commission levies on any bank saved through a government bailout. WestLB, which needed €5 billion ($6.77 billion) in government assistance in April 2008, incurred the Commission's special wrath after the bank transferred assets at inflated values to a German government rescue fund.

Meanwhile, in Britain, the Independent Commission on Banking is weighing the breakup of universal banks including Royal Bank of Scotland Group plc and Lloyds Banking Group plc, both of which were saved by the government. They, too, face EC demands to de-nationalize and pare subsidiaries.

Further south, Spain's central bank is forcing the country's ailing savings banks to merge and strengthen balance sheets or go out of business. The two largest banks, or cajas, now say they will transform themselves into commercial banks and plan to list shares through initial public offerings.

These various developments come as the European Union struggles to keep the embattled euro under control. Sovereign debt grabs headlines. But as Ireland dramatically demonstrated late last year, bad banks can sink a country just as easily.

"This is one of the major concerns in the region," says Jonathan Loyne, chief European economist at economic research consultancy Capital Economics Group. "The general fragility of banks in a number of countries suggests further restructuring and reorganizations," he adds. In Europe, "one country's banking sector affects the others."

To strengthen banks, a revamp is taking place throughout Europe, and not just in the region's most precarious nations. As a result, the pace of bank-related mergers, public offerings, divestitures and liquidations will accelerate this year and next. As one London-based lawyer explains, pressure for change is a function of both "where a country is in the financial cycle crisis and where individual banks are in the cycle."

This isn't Europe's Big Bang, Part Two. Nor is it a sudden convulsion akin to the one that rocked U.S. banks after the collapse of Lehman Brothers Holdings Inc.

Rather, it's an attempt at a methodical reordering of banks. This is both the result of the 2008 global financial cataclysm and an understanding that a similar event should never take place again. "What happened after Lehman went down was a series of immediate, emergency steps," says Christian Herweg, a Munich-based partner at Hogan Lovells International LLP. "What they're doing now is a long-term solution."

If there is one force for change that towers above others, it is the European Commission, strange as that may seem. Through its competition commission, the EC demanded concessions from more than three dozen banks that received state aid from 2007 to 2009. These concessions in effect penalize the banks through a shrinking of balance sheets and forced divestiture of certain assets. "This control of state aid is unique in the world," says Jacques Derenne, Brussels-based partner at Hogan Lovells and an authority on the EU. Derenne calls the divestments "compensatory ... and a gift to competitors."

After the crisis, the EC suspended some of its rules regarding state bailouts, most notably a six-month limit for any rescue package. However, that doesn't mean that the Commission is allowing rescued banks and their state benefactors unlimited time and flexibility. The Commission is now beginning to press the banks and the various European governments alike on implementing restructuring programs.

The sums involved in the state bailout are enormous, and it's understandable that the EC doesn't want to make this permanent. According to a Bank for International Settlements study, the EC approved almost €3 trillion in state guarantees to the banking sector and a further €300 billion-plus in capital injections.

Looming large as well is Basel III, the global financial framework that mandates increased levels of bank core capital, beginning in 2013. Governments such as Spain already are using Basel III requirements -- a minimum of 7% Tier 1 capital -- to pressure financial institutions to overhaul their operations and strengthen balance sheets. Banks throughout Europe view these requirements as ways to position themselves, either defensively or offensively.

"Now that the Basel III rules have been released, banks have a greater understanding of what regulatory capital they need to hold," says Maegen Morrison, a London-based partner at Hogan Lovells. "That plays into their acquisition strategy."

For some, that means the ability to expand. For others, it could prove quite the opposite. "There's no doubt in my mind there will be a consolidation," says Henning Kruse Peterson, chairman of the board of Danish government agency Finansiel Stabilitet A/S, speaking of his country. "That's a must. Otherwise, all the banks can't handle the new regulations."

Despite Brussels' best efforts, however, European banks aren't moving in anything remotely resembling lockstep. Countries and their banks differ, sometimes radically. While both Spain and Ireland suffered from massive property loans gone bad, Spanish banks bear little resemblance to those in Ireland. How Britain approaches its bailed-out banks differs from Germany. Various banks and various countries are at different points in the transition. Even top banks in, say, France or Italy have decided in the post-financial-crisis period to play to different strengths and in different arenas.

Distress pops up throughout Europe, and not just among the usual suspects. Earlier this month, the Danish government was forced to take over Amagerbanken A/S, after the country's fifth-largest lender went bankrupt. An auction is anticipated by late April.

Even within a particular country, there's little uniformity. Spain's cajas may be struggling, but its two largest commercial banks -- Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA -- are acquisition-fueled global powerhouses. They remain aggressive. Santander, for example, bought HSBC Holdings plc's U.S. auto loan business in August 2010 for $3.56 billion in cash. A month later, it acquired distressed Allied Irish Banks plc's 70.4% stake in Poland's Bank Zachodni WBK SA for about €2.9 billion, outbidding both BNP Paribas SA and Poland's largest bank, PKO Bank Polski SA. Earlier this month, Santander tendered an offer for the remaining shares.

Michael McDonald, a London-based partner at Cleary Gottlieb Steen & Hamilton LLP, cites that deal as indicative of another trend. "There hasn't been so much cross-border banking deals within [Western] Europe. Cross-border banks that are reasonably strong are looking at emerging markets, jurisdictions where they don't have a footprint."

That doesn't mean they're ignoring home turf. With Spain's savings banks on the ropes, Santander and BBVA are poised to expand domestically. BBVA crowed in a 2010 earnings presentation earlier this month that it could boost its market share in Spain by as much as half just through grabbing business from failing or consolidating cajas.

Just how all these various forces and counterforces will work themselves out isn't at all clear. Even healthy European banks are scrubbing bad loans. In the years leading up to the financial meltdown, some banks made aggressive and ill-timed acquisitions in countries such as Hungary and Greece. "A lot of banks that could be acquiring need to first put their own houses in order," says Morrison. "The economic climate across Europe means that many banks are struggling with the performance of their own businesses, and this is diverting management attention away from acquisitions."

One big unknown is the role of outsider investors. In the days leading up to the WestLB deadline, for example, some German press reports floated China Development Bank as a potential buyer of some WestLB assets. The Chinese state-owned financial institution quickly dismissed the speculation as unfounded.

Still, Chinese banks are beginning to flex their muscles internationally and may just decide it's worth establishing a presence in the EU, now the country's biggest trading partner. However, getting a well-capitalized bank from high-growth Asia to invest in a troubled bank in plodding Europe may be more wishful thinking than anything else.

Private equity participation is more likely, European analysts and advisers believe, as many PE firms have experience with distressed financial institutions. Three of the biggest distress PE funds -- Apollo Global Management LLC, J.C. Flowers & Co. LLC and Lone Star Funds -- were identified as potential buyers of WestLB assets.

Another noticeable trend is consolidation of business lines across Europe. The biggest arena for this is in money management. At the end of 2009, for example, Société Générale SA and Crédit Agricole SA merged money management operations into a joint venture, owned 75% by Crédit Agricole. Called Amundi, the combined group started with more than €650 billion under management, which ranks third in Europe. Last month, Société Générale Private Banking Hambros agreed to acquire the private-client investment management business of Britain's Baring Asset Management Ltd.

French banks are also proving adept at certain back-office operations. Banks in some other countries like Italy are happy to unload these functions. "It's cost cutting, and it's economies of scale," says Pierre-Yves Chabert, a Paris-based partner at Cleary Gottlieb.

Here is a quick sampling of six European destinations and their banks-related activity. Apologies to others. Europe is a big continent.

Spain

The Bank of Spain set an Oct. 1, 2011, deadline for the cajas to boost reserves to an extremely steep 9% to 10% Tier 1 capital. If they fail to do so, the state's rescue fund, known as Fondo de Reestructuración Ordenada Bancaria, or FROB, will step in and nationalize. Cajas shareholders will lose their equity.

That has set in motion a dramatic reordering of Spanish banks. The country's largest caja, Caja de Ahorros y Pensiones de Barcelona, known as La Caixa, announced in late January that it is transforming itself into a commercial bank, CaixaBank, and will stage an IPO to raise additional capital. The commercial bank should be launched by July.

The country's second-largest caja is doing the same. Caja de Ahorros y Monte de Piedad de Madrid, known as Caja Madrid, which had merged with six other cajas in 2010, formed the Banco Financiero y de Ahorros SA commercial bank in January. It is waiting for regulatory approval and said there are similar plans afoot for an IPO.

Bank of Spain pressure has already reduced the number of cajas from 45 to 17. Many of those remaining are scrambling to merge. Some won't make it. "Many savings banks don't have a future anymore," says César Herrero, a Madrid-based partner at DLA Piper Spain SL. The government, he says, "is trying to save the solvency of the whole system, not just one caja."

Even those savings banks that merge may not be able to survive independently. "The first step was really among savings banks," says Javier Ybañez, Madrid-based partner and the head of corporate practice at J&A Garrigues SLP. "The next step is not so clear and won't be limited to savings banks. Someone needs to provide capital."

"Savings banks can be advantageous acquisitions," says Ramón Girbau, also a Garrigues partner. "Objectively, there are good opportunities for banks wishing to enlarge their commercial networks."

Germany

The WestLB sale is garnering attention these days, but it's only the first forced sale of a distressed German bank. Most of the country's eight Landesbanks are in trouble. They invested heavily in derivatives and other toxic assets, and needed some kind of state support to survive. BayernLB, which was in merger talks with WestLB for several weeks last year, could be the next to be forced into some kind of action. Landesbank Baden-Württemberg, the country's largest, is already under a Commission mandate to shrink its balance sheet and divest assets.

In October 2010, Hypo Real Estate Holding AG, the mammoth mortgage lender that the government saved from insolvency through a series of bailouts, transferred €173 billion worth of toxic loans and securities into a bad bank, one of two Germany set up to absorb the bad debt.

Until earlier this month, Hogan Lovells' Herweg reports, the assumption was that the government would hold Hypo RE until it was profitable, then privatize it. Now, he says, it's uncertain, and there are reports Hypo RE may be liquidated.

More generally, Herweg says, "in the long run, the bad banks will be liquidated. It doesn't necessarily have to happen immediately. What they're not doing is conducting a fire sale."

Add to this a new law that took effect at the beginning of the year that will make a Chapter 11-like restructuring possible.

Christoph von Wilcken, a Berlin-based attorney with the insolvency specialists Schultze & Braun GmbH, says with the new law in place, there are expectations of further restructurings, including those banks that specialize in maritime lending.

Great Britain

These days, the focus in Great Britain is on the Independent Commission on Banking, sometimes referred to as the Vickers commission, after its chairman, Sir John Vickers, a former chief economist of the Bank of England. The commission is charged with drafting a blueprint on the future of British banks, in particular tackling the issue of whether banks should not be allowed to become too big to fail. Inherent in this are recommendations as to whether two of the country's three biggest banking groups should be broken up.

In the aftermath of the global financial crisis, the British government plowed £46 billion ($73.4 billion) into Royal Bank of Scotland and, according to the Department for Business, Innovation and Skills, £17 billion into Lloyds Bank. The government owns 43.4% of Lloyds. Some in Britain advocate that Lloyds, which took over another distressed institution, HBOS plc, in an early 2009 merger the British government stage-managed and financed, should be split up again.

RBS executives said recently they will be prepared for privatization to begin early next year. British press reports talk of an initial tranche of £4 billion.

"We're in the very early stages," says Cleary Gottlieb's ­McDonald, who believes the commission may require the auction of noncore assets. "They're keeping their cards close to their chest."

The commission's final report is scheduled for September.

Ireland

Earlier this month, the Irish government's National Treasury Management Agency said it would begin auctioning off assets of failed banks Anglo Irish Bank Co. Ltd. and Irish Nationwide Building Society, part of a liquidation scheme. The government plowed tens of billions of euros into the two institutions in disastrous efforts to keep them afloat. That bailout eventually forced an International Monetary Fund-EU rescue.

Ireland's crisis affected even the biggest and healthiest of the four major banks, Bank of Ireland Group, which was forced to take government funds in 2009. As part of a restructuring agreement with the EC last year, the bank agreed to sell off a number of subsidiaries. Last month, it sold its asset management business to State Street Global Advisors and announced it would put up for sale its life insurance business.

Greece

Greece's crushing sovereign debt may have come close to sinking the country, but its banks have remained surprisingly buoyant. Piraeus Bank SA, for example, earlier this month successfully marketed a €1.25 billion covered bond facility after the country's fourth-largest bank raised €807 million through a rights issue.

That doesn't mean the country's banks are home free, however. "Their loan portfolios are becoming more and more a concern," says Christina Papanikolopoulou, a partner with Athens-based Kyriakides Georgopoulos & Daniolos Issaias. She says the EU and the IMF are keeping a close eye on Greek banks. "There's an increase in nonperforming loans as more and more companies aren't making payments."

The biggest question mark is Agricultural Bank of Greece SA, which is more than 70% state-owned, and which spectacularly failed the EU stress test last year. There are now talks of a rights issue.

Italy

Italian banks underwent dramatic consolidation in 2006 and 2007, a move championed by then-new central bank Gov. Mario Draghi to bolster and modernize the country's financial system. That bulking-up gave banks a necessary cushion when the global financial meltdown struck.

While the major banks remaining show little appetite for further large-scale expansion, some Italian banks are once more beginning to pare operations and sell off certain business lines. One indicative deal was State Street Corp.'s €1.28 billion acquisition last May of Intesa Sanpaolo SA's securities services business, which includes custodial banking and fund administration units.

"The situation is more complex than it used to be," says Pietro Fioruzzi, a Milan-based partner at Cleary Gottlieb who believes that kind of deal may become more commonplace.

That kind of M&A activity doesn't translate into major Italian banking mergers, however. "We should not expect large banks to become larger and larger," Fioruzzi says. "I don't see a market for large-scale cross-border or domestic M&A for Italian banks."

M&A-related activity over the past year has been largely focused on consolidating business lines and selling off operations. That could continue to be the pattern, says Fioruzzi, even as Basel III kicks in. "Will Italian banks need to raise capital? Probably," he says. "That may mean capital markets capital-raising transactions, or it may mean money coming from divestitures of businesses that banks used to do in-house but no longer need to." -- Renee Cordes contributed to this story.