Commerzbank, Germany's second-biggest bank, said on Thursday that it and Royal Bank of Scotland and South Africa's Standard Bank, plan to take Dubai to court over unpaid loans.
Commerzbank said in a statement that it and the two other banks had been seeking a "consensual solution for over two years with Dubai Financial Group" concerning the restructuring of some $10 billion in debt.
Dubai Financial Group is a division of Dubai Holding, the investment arm of sheikh Mohammed bin Rashid Al Maktoum.
"During that time Dubai Financial Group had been in default of its obligations and had failed to repay the debts or interest owed," the statement said.
"Despite the banks' goodwill and numerous possible long term concessions offered by the banks, no viable solution has been reached. In the circumstances, Commerzbank, RBS and Standard Bank were unfortunately left with no alternative but to pursue the legal recourse," the statement said.
The banks insisted they would prefer to come to an agreement "without formal legal proceedings and we therefore remain open to such an outcome if an acceptable commercial resolution is forthcoming."
So far, banks have avoided taking legal action to recover their loans.
Dubai, famous for its gargantuan real estate projects, found itself in financial difficulty in late 2009 as a result of the global financial crisis and requested a moratorium on its debt repayments.