The Bank for International Settlements (BIS) said on Thursday the world's top 102 banks would have been 15.1 billion euro (12.01 billion pounds) short of capital to reach a 7 percent target for common equity at the end of December, compared with an estimated shortfall of 57.5 billion euros six months earlier.

This continues a sharp reduction in the theoretical capital shortfall faced by banks, which was estimated at 374 billion euros less than three years ago.

The gap has narrowed as banks have raised equity, held back more of their earnings, shed loans and other assets and restructured their businesses.

The BIS has been monitoring how well banks are transitioning to the implementation of tougher capital rules, which are being phased in from 2013 to 2019, and releases its findings every six months.

The banks in the sample made after-tax profits of 419 billion euros prior to dividend payouts in 2013, BIS said.

Most of the capital shortfall would be at European banks.

Europe's top 42 banks would have been 11.6 billion euro short of capital to reach the 7 percent target (which includes add-ons that are applied for the biggest banks), down from a 36.3 billion shortfall six months earlier, the European Banking Authority said.

The BIS said the common equity capital ratio, a measure of capital strength, of the top global banks averaged 10.2 percent of risk-weighted assets at the end of December, up from 9.5 percent at the end of June 2013.

It said the average leverage ratio - a simple measure of equity to assets, without accounting for the riskiness of loans - was 5 percent for the 102 banks, but nine of the firms did not meet the minimum leverage ratio requirement of 3 percent.

(Reporting by Steve Slater; Editing by Nishant Kumar and Mark Potter)

By Steve Slater