Basel eases capital fears, banks still in spotlight

New capital rules set by global regulators brought relief to the world's banks on Monday, giving weaker lenders time to raise funds and freeing the strong to lift dividends or hit the acquisition trail.

But the biggest international banks still face a capital surcharge on top of Basel III rules announced late on Sunday, to tackle concerns that banks deemed "too big to fail" may take risks that could derail the entire financial system.

"The (Basel) agreements certainly reduced probability of failure for systemically important banks but it doesn't resolve the moral hazard problem as these banks are too big or too interconnected to fail," said Mario Draghi, Governor of the Bank of Italy and head of the Financial Stability Board (FSB).

The FSB, a separate body from the Basel group, will put forward its proposals to a summit of G20 leaders in November.

Investors welcomed the long phase-in of new capital standards under Basel III, shrugging off comments from one of the architects that the sector would eventually have to raise hundreds of billions of euros.

Europe's banks jumped two percent to a one-month high and the euro rose 1 percent versus the dollar.

"Authorities have agreed and realised they need to let the banks recover first and start to lend to participate in the recovery," said Guy de Blonay, who co-runs fund manager Jupiter's 1.4 billion pound Financial Opportunities Fund.

The new Basel III requirements will demand banks hold top-quality capital totalling 7 percent of their risk-bearing assets, more than triple what they do now, but a long lead-in time eased fears of a rush to raise capital.

Europe is the most likely region for banks to need to raise funds, notable in Germany and Spain.

"It will be hundreds of billions (of euros)," European Central Bank Governing Council member and head of the Basel Committee on Banking Supervision Nout Wellink said of the capital-raising needs.

"Partly they will have to retain profit for years which they cannot use to pay shareholders or bonuses. For another part, this will vary from bank to bank, they will have to get it from the capital market," Wellink, who heads the Dutch central bank, told Dutch NOS Radio 1 Journaal.

The new capital ratio represents a substantial increase from the current requirement of 2 percent, but is significantly lower than what banks had feared earlier this year and comes with a phase-in period extending in part to January 2019.

European Central Bank President Jean-Claude Trichet said regulators had struck a good balance between strengthening capital while allowing lenders to lend, but said it remained "a work in progress".

He said the more stringent capital requirements for banks would not hamper global economic recovery.

Top German lender Deutsche Bank is seeking a headstart on rivals such as Commerzbank by announcing plans to raise almost 10 billion euros to bolster its capital. It said it would meet the Basel III rules by the end of 2013.

Banks will not be required to meet the minimum core tier one capital requirement, which consists of shares and retained earnings worth at least 4.5 percent of assets, until 2015.

An additional 2.5 percent "capital conservation buffer" will not need to be in place until 2019.

When regulators issued an initial consultation document last year the new rules were expected to come into force by the end of 2012, but banks urged delay, citing worries that a speedy introduction would hit a fragile economic recovery.

Most banks in Asia, outside Japan, have capital levels well above the minimum levels under Basel III. Shares in Japanese banks, which have slightly lower levels, also rose.

"It's no big bang for banks, not with a phase-in arrangement of five years," said Commonwealth Securities analyst Craig James.

Banks that will benefit from the longer transition period were among the top gainers in Europe, with France's Credit Agricole up 6 percent and Italy's Banco Popolare up 4.5 percent.

Many top banks in the United States and Canada, the Nordic and Benelux regions, Britain and Switzerland have a more comfortable capital cushion and clarity on Basel rules could see them become bolder in reinstating or raising dividends or seeking acquisitions, investors and analysts said.

"It will allow them to be a bit more flexible on growth opportunities," Jupiter's de Blonay said.

Credit Suisse analysts saw 7 percent as the bare minimum for core Tier 1 capital, 8 percent as the standard for adequately capitalised banks and 10 percent as the level at which surplus capital could potentially be returned to investors.

Swiss and British banks will be among those facing extra measures imposed on systemically important banks. That could include "combinations of capital surcharges, contingent capital and bail-in debt", Sunday's statement said.

There will also be an additional counter-cyclical capital buffer of up to 2.5 percent, which national regulators will apply during periods of excess credit growth.

The Basel III agreement was reached in Switzerland by central bank governors and top supervisors from 27 countries, after a year of horse-trading and lobbying that involved banks and governments seeking to protect their national interests.

Leaders of the Group of 20 rich and big emerging economies blamed the global credit crisis partly on risky trading by banks and demanded tougher bank capital rules.

They are set to endorse Sunday's deal when they meet in Seoul in November and consider the FSB's recommendations for systemically important banks.

So far there is no consensus at the G20 to back a mandatory surcharge on top of the Basel III requirements.

"These institutions need greater loss absorbing capacity," Draghi said.

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