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Banks Rise as Basel Gives Firms Eight Years to Comply

Updated on
FSA Chairman Adair Turner
Financial Services Authority Chairman Adair Turner told reporters in Basel, "It's a very, very balanced package." Photographer: Chris Ratcliffe/Bloomberg

Bank stocks rose worldwide as regulators gave firms more time than analysts expected to comply with stiffer capital requirements aimed at preventing future financial crises.

JPMorgan Chase & Co. and Bank of America Corp. led the KBW Bank Index to a 2.6 percent gain at 12:35 p.m. in New York as 23 of the 24 companies climbed. France’s Credit Agricole SA and Dexia SA led gains in the Bloomberg Europe Banks and Financial Services Index, which rose 1.7 percent in London to a one-month high. The 224-company MSCI AC Asia Pacific Financials Index rose 2 percent, its biggest gain since July 6.

At a meeting in Basel, Switzerland yesterday, regulators reached a compromise that more than doubles capital requirements for the world’s banks, while giving them as long as eight years to comply. Germany had sought to give firms a decade to make the transition, while the U.S., U.K. and Switzerland pushed for a maximum of five years.

“The implementation period is much longer than expected,” Credit Suisse Group AG analysts including Jonathan Pierce wrote in a note to clients today. “The fact that the sector now has a greater degree of certainty about capital requirements going forward ought to act as a material positive catalyst.”

Seven Laggards

Of the banks represented in the KBW index, seven, including Bank of America and Citigroup Inc. would fall short of the new ratios based on calculations using the revised definitions of capital, Frederick Cannon, an analyst at KBW Inc. in New York, said in a Sept. 10 report. Sixty-one of the 62 largest U.S. banks would meet the new standards, Richard Bove, an analyst at Rochdale Securities LLC, said in a Bloomberg Television interview. He didn’t identify which one didn’t meet them.

The Basel Committee on Banking Supervision will force lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Banks that fail to meet the buffer would be unable to pay dividends, though they wouldn’t be forced to raise cash. Lenders will have less than five years to comply with the minimum ratios and until Jan. 1, 2019, to meet the buffer requirements.

The decision will reduce uncertainty about banks’ capital, and allow some to raise their dividends, Morgan Stanley analysts Henrik Schmidt and Huw van Steenis said in a report today.

Nordic, Swiss Banks

“Nordic banks will be the first to raise dividends, followed by the Swiss,” they wrote. JPMorgan, U.S. Bancorp and Northern Trust Corp. may be among the first U.S. firms to increase dividends, according to Morgan Stanley.

U.S. regulators may ignore the phase-in period and require banks to comply before allowing them to resume “normal capital management policies,” Goldman Sachs Group Inc. analysts led by Richard Ramsden said in a research note today.

JPMorgan climbed 3.6 percent to $41.20 at 12:54 p.m. in New York Stock Exchange composite trading. Bank of America jumped 2.7 percent to $13.91, while Marshall & Ilsley Corp. rose 4 percent to $7.24 and Zions Bancorporation increased 4.8 percent to $20.79.

Credit Agricole rose 5.8 percent to 11.59 euros and Societe Generale gained 4.3 percent to 45.80 euros. Dexia advanced 6.2 percent to 3.41 euros in Brussels. Deutsche Bank AG rose 1.7 percent to 48.51 euros and Commerzbank AG, Germany’s second-biggest lender, advanced 2.4 percent to 6.44 euros.

Greece, Italy

The cost of insuring bank bonds against default plunged to a five-week low. The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 banks and insurers fell 9.5 basis points to 120 as of 1 p.m. in London, the lowest since Aug. 10, according to JPMorgan.

European banks, less well-capitalized than U.S. counterparts, may be required to raise more funds under the new rules. Agricultural Bank of Greece, Banco Popolare SC, Credito Valtellinese Scarl and Banca Monte dei Paschi di Siena SpA may fail to meet the 7 percent ratio in 2012, the Goldman Sachs analysts said.

While banks including Credit Agricole and Banca Popolare SC probably won’t be able to return capital to shareholders, they will “benefit significantly from the long delay to implementation,” Credit Suisse analysts including Daniel Davies said in a research note.

The rule-making process, which began in 2009, has pitted nations against each other. Some, including Germany, said higher capital requirements would hurt their banks and curb lending at a time when global economic recovery is faltering. Germany led the fight for lower ratios and a slower time frame for implementation, according to participants in the talks.

German Lenders

“We have very precisely agreed upon the transition period which will permit that this standard won’t hamper the recovery,” said European Central Bank President Jean-Claude Trichet, speaking on behalf of central bankers from the G-10 nations in Basel today. “It’s good for the global economy, good for growth.”

Germany’s 10 biggest banks, including Frankfurt-based Deutsche Bank and Commerzbank, may need about 105 billion euros ($134 billion) in fresh capital because of new regulations, the Association of German Banks estimated on Sept. 6.

While Germany didn’t get all the deadlines extended, it won some concessions for its state-owned banks, which may find it harder to comply. Government capital injections will continue to count as common equity until the end of 2017, even if they were in a form that the new Basel rules consider as not qualifying. State banks get an extra five years of exemptions to rules tightening the definition of capital.

Asian Banks

Deutsche Bank, Germany’s biggest lender, is seeking to raise at least 9.8 billion euros in a stock sale. The lender expects to fulfill the Basel requirements no later than the end of 2013, and won’t need fresh capital to meet requlatory standards after its stock sale, Chief Executive Officer Josef Ackermann said today.

U.K. banks are unlikely to have difficulties meeting the capital requirements, JPMorgan Cazenove analysts led by Carla Antunes da Silva said in a report.

Banks in Asia have high capital ratios and will be able to avoid the degree of fundraising needed elsewhere, said Zhu Min, a special adviser to the International Monetary Fund.

“Today if you look at the whole of Asia, Tier 1 capital is more than 10 to 12 percent,” and as a result “I don’t think Asian banks at the moment will go to the markets to raise a lot of capital,” Zhu, a former deputy governor of China’s central bank and vice president of Bank of China Ltd., said on Bloomberg Television from Tianjin.

The committee also gave banks until the end of 2017 to comply with the tighter definitions of capital and said that a new short-term liquidity standard wouldn’t be implemented until the beginning of 2015. While a separate long-term liquidity rule has been shelved under pressure from the banking industry, the short-term rule was expected to go into effect earlier.

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