Basel says big banks still stretched thin

December 16, 2010, 9:46 PM UTC

The world’s biggest banks are still hugely overextended.

So says the Bank of International Settlements in its latest assessment of bank capital levels. The Basel Committee of the BIS said Thursday the biggest global lenders would have needed to raise 577 billion euros ($755 billion) at the end of last year to come into compliance with tougher rules now going into effect.

It will take a bit more than that, I'm afraid.

The Basel committee sets international rules for how much money bankers must hold to absorb losses and survive funding crises. The latest version of its rules, known as Basel III, are being phased in over the next decade.

The committee’s latest exercise covered 94 so-called group one banks – well-diversifed, internationally active banks with shareholder equity and retained profits totaling at least 3 billion euros ($4 billion). They would have to raise an average of $8 billion each to come into compliance with the new rules, though of course they will have years to do so.

Even so, the size of the balance sheet hole isn’t to be snickered at. Going by 2009 numbers, it would take banks almost three years to cover their capital shortfall through the preferred method, which is simply holding onto earnings as they roll in.

Basel doesn’t name names, because doing so would be unseemly and could possibly create unsightly bank runs. About the top 30 or so U.S. banks would qualify in terms of their capital holdings, though it’s not clear how many would survive the well diversified or internationally active tests.

In any case, the report comes as investors are wrestling with the risks tied to fragile banks and their overburdened state sponsors in the wake of a debt-fueled economic meltdown. Questions about the solvency of banks helped push Ireland into a bailout this month, and those same questions are now vexing authorities in Spain. It is already facing rising borrowing costs and could face a costly ratings downgrade in part because of the banking problem.

Authorities in the United States averted the worst case in the 2008-2009 meltdown by making it clear they would do anything, including running the Fed printing press full out, to keep the biggest banks from failing. But they don’t have that option in Spain and it is easy to see where that could soon be a problem, higher Basel III standards or not.