EU banks $98B short of meeting Basel III capital rules

The largest European banks were 70.4 billion euros ($98 billion Cdn) short of meeting new capital ratios meant to prevent future bank failures at the end of 2012, according to the European Banking Authority.

The Basel III rules, adopted in 2011, demand that Europe's biggest banks have a capital ratio of seven per cent of assets weighted for risk.

The rules were implemented in response to the 2008 financial crisis, which crippled European banks and showed the small size of the capital cushion they maintain to leverage against bad loans.

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Canada's biggest banks also must conform to the Basel III rules, but they already faced much more stringent regulations about capital adequacy before 2008. That is one of the reasons no Canadians banks failed in the meltdown that began with the collapse of Lehman Brothers investment bank.

Canadian banks are considered among the safest in the world.

Need to raise $148B

However, European banks still have a long way to go to improve their capital positions.

The 42 EU banks would have to raise an estimated 106 billion euros ($147.7 billion Cdn)by 2018 to meet the standards, which rise gradually over the next few years, the European Banking Authority said. The banks have boosted their capital levels by 29 billion euros ($40.4 billion Cdn) since June 2012.

European lenders also will have to hold an extra 225 billion euros ($313.5 billion Cdn) of easy-to-sell assets to meet internationally agreed liquidity standardsthat say banks must have a buffer of assets to fund them through a 30-day credit crunch, the EBA said.

"Given these results, an additional effort by banks to fulfill the risk-based capital requirements is expected, although part of the initial shortfall has already been covered since the last reporting date,"the EBA said.

The EBAchecks into bank's progress every six months.

Mark Carney, former governor of the Bank of Canada and now chair of the Financial Stability Board and governor of the Bank of England, praised Europe's banks for the progress they've made in a speech last month.

Large international banks raised about half a trillion dollars in fresh capital since 2009 and are moving closer to complying with global capital rules, he said.