SNL Financial reported that larger banks made considerable progress in moving toward compliance with the final Basel III rules in the second quarter, but smaller institutions only inched closer to meeting the capital requirements.

The final Basel III rules, approved in early July, excluded many of the most contentious items included in the capital regime when it was originally proposed. SNL found that banks were better prepared, at least from a capital standpoint, to comply with the final rules through the first quarter and the exclusion of such items like a provision that would include unrealized gains and losses in regulatory capital, at least on an opt-out basis; the decision to count trust preferred securities as regulatory capital for banks under $15 billion in assets might have benefited the industry.

SNL said the trend continued in the second quarter, at least for larger banks, which seemed to be on even stronger footing through the end of the second quarter.

SNL said it tried to measure how relatively healthy banks stacked up against the Basel III requirements and accordingly excluded banks with adjusted Texas ratios, which excludes government guaranteed loans, in excess of 100%, a widely considered threshold at which banks tend to fail. SNL also excluded institutions that had negative equity but still managed to report adjusted Texas ratios less than 100%.

When excluding those institutions, foreign-owned entities and BHCs with less than $500 million in assets, SNL found no capital shortfall at banks with assets between $15 billion and $250 billion under the “conservative” scenario at end of the second quarter. At the end of the first quarter, SNL found the capital of those institutions would fall short of the minimum requirement by $380.6 million, or 0.48% of their risk-weighted assets, under the “conservative” scenario.

Banks with less than $15 billion in assets narrowed their shortfall to the final Basel III capital requirements in the second quarter, albeit barely. Smaller banks have long lagged larger institutions, accounting for a greater portion of the industry’s shortfall under the proposed rules despite their smaller size. In the second quarter, those institutions were responsible for the entire shortfall measured by SNL.

Under the final Basel III rules, smaller institutions, including all savings and loans, will have until January 2015 to begin phasing in Basel III capital rules. Large, internationally active banks must begin phasing in Basel III requirements in January 2014.

To read the entire SNL report, click here.