LONDON (MarketWatch) -- The Bank of England on Friday said measures to strengthen banks' capital levels need to be phased in over a number of years as a media report also indicated the committee responsible for setting new capital requirements will pare back some of its tougher suggestions.

In its bi-annual Financial Stability Report, the Bank of England said U.K. lenders face several sometimes contradictory challenges, including refinancing substantial amounts of funding, maintaining lending levels to support economic recovery and building larger capital and liquidity buffers.

In the face of these challenges, the new capital rules from the Basel Committee should be introduced gradually, the central bank said.

"An extended transition to this new regime would enable banks to build resilience through greater retention of earnings, while sustaining lending," the Bank of England said.

The report, which also highlighted the risk to U.K. banks from sovereign debt worries in Europe, came as the Financial Times reported that the Basel Committee may pare-back some of its proposals.

The latest draft of the committee's proposals will be presented at a G-20 summit this weekend in Toronto. The major change is likely to be the scrapping of a requirement that banks maintain a longer term "net stable funding ratio" that aligns the maturity of assets and liabilities, the report said.

Lenders had argued that the proposal would have driven a sharp increase in funding costs and in borrowing charges for customers, the newspaper reported.

Funding challenge

In its report the Bank of England calculated that the largest U.K. banks will need to refinance or replace 750 billion pounds to 800 billion pounds ($1.12 trillion to $1.19 trillion) of term loans and liquid assets by the end of 2012.

That equates to more than £25 billion a month, or more than double the average monthly issuance achieved so far this year. The industry also needs to extend the maturity of its wholesale funding, around 60% of which falls due within one year, the central bank said.

Mark Phin, an analyst at Keefe, Bruyette and Woods, said the Bank of England report makes the funding situation look bleaker than reality.

"We would point out that looking at wholesale maturities on a static basis does not take into account deposit growth or the ongoing balance sheet de-leverage at RBS and Lloyds, in particular," he said in a note to clients.

"We do not mean to downplay the risks, particularly against current difficult market conditions, but think it's worth pointing out that over half of the requirement can likely be offset," Phin said.

The central bank added that U.K. banks have relatively limited holdings of sovereign debt in those countries where fiscal concerns have been most acute, but that the U.K. industry does have counterparty relationships with European banks that have much larger exposures.

"If undiminished, sovereign concerns could also affect U.K. banks through their impact on global financial markets," the Bank of England said.

"Renewed concerns about counterparty risk could further reduce the availability of bank funding, and funding strains could be exacerbated by any falls in the perceived value of government support for banks," it added.