BANKING shares on both sides of the Atlantic surged yesterday in response to the Basel III rules, which were less stringent than many institutions had feared.
The FTSE 100 index soared 1.3 per cent to 5,565.53 – its highest close in four months – aided by a surge in banking shares which rose between 1.4 and 2.6 per cent higher. Bank shares in the US also rose on the news, helping the Dow Jones index close 0.8 per cent higher at 10,544.13.
The Basel committee has given weaker lenders until 2015 to boost their core Tier 1 capital ratios to 4.5 per cent, with a further grace period until 2019 to accommodate an extra 2.5 per cent conservation buffer – a timescale more generous than most institutions had hoped.
Bank of America chief executive Brian Moynihan said yesterday he is a “strong supporter” of the rules. “There is a need to strike a balance of protecting against losses while not harming future prosperity,” he said.
However, many banks will be forced to raise eye-watering sums to meet the requirements.
“It will be hundreds of billions [of euros],” European Central Bank Governing Council member and head of the Basel committee Nout Wellink said of the capital-raising needs yesterday. “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 said.
Angela Knight, chief executive of the British Bankers’ Association, warned that the cost of borrowing will rise as a result of Basel III, spelling the end of the cheap money era. “All the changes are good from a stability perspective but add billions to the fixed operating cost of a bank. The consequence is that inevitably the cost of credit will rise,” she said.
Others complained that the rules on capital holding did not go far enough. Christophe Nijdam, a bank analyst at AlphaValue, told City A.M. the rules on extra buffers “have no teeth” and warned: “When you look at the stress tests, most nations’ regulators made sure their banks weren’t singled out. National regulators won’t use the countercyclical buffers, and even if they do they won’t communicate it to the markets.”
Adding to investor cheer, China over the weekend reported that industrial production climbed nearly 14 per cent in August from a year ago, with data from the world’s second biggest economy coming after analysts had forecast a slowdown.