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Europe’s banks face $95 billion funding shortfall

Canary Wharf, London
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Europe's largest banks will need to find an extra 70.4 billion euros ($95 billion) of capital to comply with the tough banking rules due to be implemented in 2019, according to a report by the region's banking regulator.

But the European Union's (EU) 42 leading lenders are on track to meet the capital requirements of Basel III – a set of banking reform measures - ahead of schedule, the European Banking Authority (EBA) said on Wednesday.

The 70.4 billion euros shortfall as of December last year was 29.1 billion less than the deficit recorded six months earlier, as banks stump up their capital reserves.

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"This reduction in the… capital shortfall partly reflects the continuous efforts by European banks following the EBA recapitalization exercise," the watchdog said in the report.

Basel III, which is due to come into effect at the start of January 2019, aims to strengthen the banking industry following the financial crisis of 2008 which saw a number of big banks – such as Lehman Brothers – collapse. Many others received state aid after being deemed "too big to fail" – meaning that if they went under they would significantly damage the wider banking industry and economy.

Under the rules, banks are required to have a capital buffer of at least 7 percent of their assets on a risk-weighted basis to protect them from further financial and economic shocks. They must also have enough liquid assets to survive market upsets of up to 30 days, known as the liquidity coverage ratio.

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The EBA's report also found that in December 2012, the EU's largest banks already had more liquidity than they are required to by 2019.

However, the Basel III rules have sparked concern that the new capital limits might cause banks to lend less, which could lead to businesses and families turning to unregulated "shadow banks" for credit.

Last month, the Bank of England said it would reduce the level of required liquid asset holdings by £90 billion once the country's eight largest banks and building societies had met the 7 percent capital threshold.

"That will help to underpin the supply of credit, since every pound currently held in liquid assets is a pound that could be lent to the real economy," the central bank's governor Mark Carney said in a speech.

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There have also been calls for a simplification of the Basel III requirements. Julian Franks, a professor of finance at the London Business School (LBS) who gave evidence to the Parliamentary Commission on Banking Standards, last week criticized the measures.

"We know Basel I and Basel II didn't work - and there is a fear that Basel III will go the same way," he told CNBC.

"Some of these regulations are incredibly complex. It is understood by some lawyers but not understood by bankers. That's why people want very simple leverage ratios to be imposed. They are simple and can be readily understood by everybody."

By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop

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