Basel Would Have Left Banks With $797-Bn deficit

Basel bank regulators said rules on capital requirements would have forced financial institutions to raise euro 602 billion ($797 billion) of capital had they been in place at the end of last year.

Lenders would also have had a 2.89 trillion-euro shortfall in the funds needed to guard against a run on deposits had the planned Basel Committee on Banking Supervision’s rules been in place at the start of 2010, the panel said in a statement on its website today. The committee agreed in July to phase in the capital and liquidity rules by 2019 in a bid to mitigate their effect on banks emerging from the credit crisis.

Regulators are overhauling bank liquidity and capital requirements because existing rules, known as Basel II, failed to protect lenders from insolvency during the financial crisis. The main elements of the overhaul were approved by leaders of the Group of 20 countries last month.

The shortfall projected by the Basel committee is a “vivid demonstration of the sheer impact of the new liquidity standards,” said Etay Katz, regulatory partner at law firm Allen & Overy in London. “There is a considerable concern about finding an effective way of bridging such a shortfall — bar drastic changes to business plans and business disposal programs which may be unfeasible or imprudent.”

Lenders would have had a 2.89 trillion-euro liquidity shortfall against a net stable funding ratio at the end of 2009, the Basel committee said. That ratio, slated to be put in place in 2018, aims to limit the mismatch between the duration of loans and deposits to ensure banks don’t face funding shortages.

Lenders at the end of 2009 would also have had a shortfall of euro 1.73 trillion in the assets required to meet a separate liquidity coverage ratio, which gauges banks’ ability to survive a 30-day credit crunch. That ratio is scheduled to be effective from 2015.