International regulators are moving toward an agreement that would require banks to raise vast sums of new funds to cushion against future losses, but in a concession to the industry and some governments, the rules are likely to take effect later than expected, according to people familiar with the matter.

In the aftermath of the banking crisis, regulators and finance ministers are racing to hammer out, by the end of the year, new rules governing bank capital and liquidity, or ready funds for their daily operation. The goal has been for the rules, designed to foster a more conservative banking system that is less vulnerable to crises, to kick in globally at the end of 2012.

But a consensus is emerging for a more gradual implementation that may stretch several years beyond 2012. Banks and some governments, notably Japan, Germany and France, have pushed for slower implementation, arguing that the current deadline could lead to multitrillion-dollar funding shortfalls at a time when much of the banking sector will most likely still be fragile.

The stakes are high. Industry and government officials believe the regulatory overhaul, which is expected to be a focal point of this weekend's G-20 meetings in South Korea, will have greater implications for banks and the global economy than the U.S. regulatory changes emerging in Washington. Other crucial details remain unresolved, including disputes over the types of funds banks will be allowed to count toward toughened capital and liquidity requirements.

Bank executives, sometimes with backing from their governments, have been waging an intense lobbying campaign to water down parts of the so-called Basel proposals, known for the Swiss city in which the accords traditionally have been negotiated. Analysts expect that the changes--even if they are relaxed to incorporate banks' feedback--could crimp industry profits by double-digit margins.

The banks have been trying to use their central role in supporting economies to urge regulators to back off. They are arguing that the new capital and liquidity requirements are so onerous that they will force institutions to curtail already sparse lending, which could imperil fragile economic recoveries world-wide. They have also insisted that they need more time to adjust to new rules.

"In combination, the proposals will inevitably reduce credit availability, increase the cost of borrowing and lead to slower economic growth," warned an April 16 letter from Bank of America Corp.'s treasurer to the Basel committee. The letter called the proposed two-year implementation time frame "too brief given the current state of the economy and the magnitude of the effort."

As part of the rule-making process, the banks this spring conducted studies to gauge the likely impacts of the proposals on their capital and liquidity levels. The banks presented their findings to their national regulators, who compiled the data and recently submitted their findings to the panel charged with crafting the rules. They are supposed to discuss the results next month in Switzerland.

The data show that banks world-wide would face capital and liquidity shortfalls under the proposals, according to government and industry officials briefed on the results. In Europe, bank executives say there is likely to be a gap of more than €1 trillion ($1.2 trillion) between banks' current capital and liquidity buffers and what would be required under the Basel proposals.

In discussions with banks, some government officials have expressed skepticism about the findings, arguing that the banks have an incentive to be overly gloomy. But officials nonetheless believe that the capital and liquidity holes may be too deep for banks to quickly fill, according to the people familiar with the matter.

Those convictions have hardened over the past month, as risk-averse investors have fled European banks due to jitters about the escalating sovereign-debt crisis. Even without the new rules, European banks face the challenge of renewing roughly €800 billion in debt that's maturing by the end of 2012, according to the European Central Bank.

The result is a broadening consensus among several countries that the rules should be phased in over time, rather than by the end-of-2012 deadline that the Basel committee proposed in December when it announced its proposals.

France, Germany and Japan have pushed for as much as a 10-year window before the rules go fully into effect, and U.S. and U.K. officials recently have indicated that they would support a gradual time frame, according to people familiar with the matter.

"I'm perfectly comfortable with us negotiating reasonable transition period to help make people more comfortable that they can live with those new standards," U.S. Treasury Secretary Timothy Geithner said Wednesday afternoon in Washington, before leaving for the G-20 meeting.

U.S. and European officials already have agreed to delay new rules that will require banks to hold greater capital buffers to protect against losses from their investment banks' trading businesses. Those rules, part of a Basel accord that was agreed to in 2009, were scheduled to kick in this year.

But after a May 12 meeting between Geithner and European Commissioner Michel Barnier, the Treasury issued a statement noting that "they will work towards a common implementation date in 2011 for the Basel trading book rules." Industry officials say the Europeans agreed to the delay under pressure from the U.S., which worried about the impact on U.S. investment banks.

A gradual approach carries risks. A previous version of the Basel accord, which was supposed to be implemented in 2004, has been dogged by complaints that certain countries, including the U.S., have been slow to require their banks to comply.

If the deadline is pushed back, some banks will continue to operate with thinner capital and liquidity cushions, potentially leaving them exposed to future crises. Some regulatory officials privately worry that the rules could be further delayed or weakened if they aren't implemented while memories of the recent crisis remain fresh.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.