Critics say many have been too slow to acknowledge the scale of the problem and need to step up the pace of change.

In recent weeks, new bosses at Deutsche Bank (DBKGn.DE) and Barclays (BARC.L) have responded, pledging to attack high pay and signaling a new intensity in the cost-cutting drive.

"Banks are throwing in the towel and saying now we need to resize for the new environment," said Andrew Lim, analyst at Espirito Santo in London.

"They didn't want to get caught out by seeing revenues rebounding, but they've now seen the debt crisis continuing quarter after quarter."

The scale of the challenge is daunting.

Investment banks may need to cut 30-40 percent of staff to correct industry overcapacity brought about by efficient new technology and clients demanding fast trading execution at the best price more than advice on deals, said Simon Maughan, analyst at Olivetree Securities.

Consultancy Roland Berger predicts a more modest cut of up to 15 percent over the next five years, but that would still see the axe fall on 75,000 staff from a global 500,000 workforce.

"We feel that real capacity reduction is the only way to restore economics in the mid-term," Roland Berger said, adding that banks need to exit product lines and consider joint ventures on top of job cuts to be able to deliver sustainable return on equity (RoE) of over 12 percent.

Based on cuts taken to date, RoE - a key measure of profitability - is likely to average just 9 percent, and could be as low as 5 percent, it said. That compares with a cost of equity of 10-12 percent.

"Perhaps another five years down the road we will look back on 2012 as the year that decided the fate of banks that survived and those banks that did not," the Roland Berger analysts said.

UBS (UBSN.VX), Credit Suisse (CSGN.VX), Deutsche Bank, Royal Bank of Scotland (RBS.L), Barclays and BNP Paribas (BNPP.PA) have each cut hundreds or thousands of jobs.

London has also been hit by culls by overseas firms like Nomura (8604.T) and Citigroup (C.N).

The Centre for Economics and Business Research has predicted that by the end of this year the city will have lost 100,000 jobs since 2007, leaving 255,000 finance jobs, the lowest since early 1996.

RBS this week pointed up the unrelenting focus on costs.

Its plan to shrink and reshape its investment bank is on track after cutting 29 percent of bankers since the end of 2010, but it said another 300 jobs will have to go - a warning light for most rivals who have made cuts of 6-10 percent.

"WE HAVE A PROBLEM..."

Typically it takes a new chief executive to deliver a blunt admission that costs need to be attacked.

"We clearly have a cost problem," Stuart Gulliver admitted in May 2011, shortly after taking the CEO hotseat at HSBC (HSBA.L), Europe's biggest bank.

He set out to cut $3.5 billion from annual costs to reverse a similar rise in costs that had added no revenue, but warned it would take several years.

That signals a long cost-cutting road ahead for several new CEOs, and there are already concerns some will not deliver on aggressive promises without battering revenues.

Deutsche Bank's new co-CEO Anshu Jain said he will lead the industry in changing compensation structure after promising to slash annual costs by 4.5 billion euros by 2015, a move he said was born out of a grim outlook for retail and investment banking.

"We do not feel comfortable telling you a revenue story. It will be a cost story," he told investors earlier this month.

Yet many are dubious. After all, Deutsche's costs have been bloated by its investment bank, the business that Jain previously ran.

"Deutsche Bank is being more aggressive and it needs to be. But in achieving that target they are much more likely to suffer an impact on their revenue than their peers," Espirito Santo's Lim said.

Deutsche's costs represented 83 percent of income in the second quarter and Jain wants to bring that below 65 percent and into the 55-65 percent range that is seen as a relatively efficient operating level for investment banks.

Analysts said other banks implementing cutbacks risk failing to execute change while losing revenue at the same time.

Banks have held down costs in the past year, but costs in the first half of 2011 were 45 percent higher than six years earlier, according to analysis of 11 European banks by Reuters last year.

Not all the cost pressure originated in bonus payments.

Banks are now taking a hard line on non-compensation costs too, targeting wasteful spending on IT systems, streamlining procurement, moving staff out of pricey locations and getting strict on travel, newspapers and even biscuits.

But in the volatile and rankings-obsessed world of investment banking, the main worry is that cutting back too hard could see top staff walk and income slump, leaving banks wary.

"If they go too far ahead of the competition they might lose market share and lose their job before they are proved right," Maughan said.

That could see a more steady, persistent approach.

"It looks like death by a thousand cuts. Announcing a massive strategic review would send out the message that an institution is deep trouble," said John Purcell, managing director of London headhunters Purcell & Co.

(Additional reporting by Sarah White; Editing by David Cowell)

• A Permanent Economic Emergency