Top banks have 115 billion euro capital shortfall, most in Europe

By Huw Jones

LONDON (Reuters) - The world's biggest banks would need to boost their capital by 115 billion euros (96 billion pounds) to comply with tougher rules and more than 60 percent of that shortfall is in Europe, where lenders have been slower to strengthen.

The capital shortfall fell by 83 billion euros during the second half of last year as banks retained more of their profits and raised capital, although the pace of improvement was not as quick in Europe as elsewhere.

The Basel Committee of global regulators said on Wednesday the shortfall at top international banks was based on a target to hold a minimum core capital level of 7 percent, plus capital surcharges required for the biggest banks. Its finding was based on their balance sheets at the end of last year.

Some 70 billion euros of the shortfall was at banks in the European Union, representing 61 percent of the global deficit. The shortfall at EU banks was cut by 29 billion euros in the second half of last year, according to a European Banking Authority (EBA) estimate.

Markets and regulators have been putting pressure on banks to move early to comply with the global Basel III accord being phased in, to dispel any doubts about their ability to thrive and encourage investors to buy their bonds and shares.

Basel roughly triples how much capital banks must hold compared with before the financial crisis, when many undercapitalised lenders had to be rescued by taxpayers.

It requires banks to have a core capital buffer equivalent to at least 7 percent of their assets on a risk-weighted basis by January 2019.

The Basel Committee said the group of 101 global banks in its sample made after-tax profits prior to distributions of 419 billion euros last year.

CAPITAL SURCHARGES

Under tougher rules which are coming in, banks must also have separate buffers of cash and government debt, known as a liquidity coverage ratio, to survive market shocks of up to a month unaided.

The rules apply to all banks, but there are capital surcharges for the big global banks deemed systemically important, such as HSBC (LSE:HSBA), JP Morgan (NYS:JPM), Citigroup (NYS:C) and Deutsche Bank (GER:DBK).

The EBA said the top 42 EU banks already held more liquidity than they are required to by 2019. In Britain, top banks are being encouraged to tap some of their excess liquidity to lend out and aid economic recovery.

There was, however, a liquidity shortfall of 225 billion euros among the remaining 128 smaller, more domestically-focused banks in a bigger sample of lenders studied by the EBA.

A third element of Basel is a leverage ratio requiring banks to hold capital equivalent to at least 3 percent of their total non risk-weighted assets.

It is meant to serve as a simple backstop in case banks have incorrectly added up their risk weightings to calculate core buffers. Regulators in Britain have been pushing hard for UK banks to meet this target as soon as they can.

The EBA said the average leverage ratio for 40 large banks it surveyed was 2.9 percent, and 17 of them had not reached the 3 percent minimum level. The capital shortfall of those banks that did not meet the leverage target was 107 billion euros, the watchdog said.

The EBA and the European Central Bank will carry out a health check of banks across the European Union later this year which is expected to show shortfalls in capital that will have to be plugged. ($1 = 0.7412 euros)

(Additional reporting by Steve Slater; Editing by Pravin Char and David Holmes)