What a surprise! Basel III bank regulations aren't as strict as feared and bank stocks rally

09/16/2010 2:29 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Bank stocks love the compromise from the bank regulators putting the Basel III rules for the global banking sector. Bank shares were up across the world on September 13, the day after global bank regulators released the draft of the new rules. The biggest gains to European banks that were thought to face the toughest challenge from the new standards.

The draft of the package, which with further tweaks to cover the world’s largest banks, will go to a November meeting of the leaders of the G20 for approval, released on September 12, calls for a 7% tier one capital ratio. That’s more than three times the current 2% capital requirement. The total tier one rate is made up of a 4.5% key capital ratio and a 2.5% buffer.  The total 7% ratio is higher than the 6% rate rumored to be in the draft, but the key 4.5% rate is lower. The additional 2.5% buffer would be applied depending on an assessment of an individual bank’s risk. The package also recommends an additional 2.5% buffer that would take effect at certain stages of the economic cycle. Details on that still need to be worked out.

But what’s got bank stocks moving this morning is what the banking industry and financial regulators in European countries, Germany in particular, were able to write into the package in exchange for those relatively rigorous capital requirements. The United States and other reform hawks wanted the rules to go into effect over the next five years. Reform doves argued for 10 years or more. The final package recommends implementation over 8 years with the first of the new rules going into effect in January 2013.

European bank stocks, such as Credit Agricole (up 6%) and Dexia (5.1), led advancing stocks in European trading. Investors had worried that European banks, which have lower capital ratios than their U.S. counterparts, would be required to quickly raise large amounts of capital. The 8-year deadline removes much of that pressure. (Asian banks, with their higher tier one capital ratios, aren’t expected to show much impact from the rules.)

The most immediate effect of the rules is to remove the uncertainty that was preventing the world’s stronger banks from raising dividends back toward pre-financial crisis levels. Among the first to do so, Wall Street analysts say, will be banks for the Nordic countries, which escaped the financial crisis with limited damage, and stronger U.S. banks such as JPMorgan Chase (JPM) and U.S. Bancorp (USB).

In the slightly longer run, the 8-year deadline will decrease pressure on banks that don’t meet the new requirements to raise capital. I think that will slow, but not reverse, the wave of bank acquisitions in the United States that I wrote about in my post http://jubakpicks.com/2010/09/13/look-for-another-wave-of-bank-acquisitions/

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