Bank shares rise after new rules agreed
What is capital?
- The capital a homeowner has in their house is the value of the house minus the value of the mortgage.
- Capital for a bank is much the same. It is all the money it has loaned or invested minus all the money it has borrowed.
- If a homeowner wanted to borrow money secured on their house, the amount they could borrow would depend on how much capital they had.
- Similarly, banks are only allowed to lend or invest an amount of money based on the amount of capital they hold.
- The big change made by the Basel III rules is that banks used to have to have £2 of capital to lend £100 but in the future they will have to have £7.
Shares in major banks rose across the world after new rules were agreed on how much capital banks should hold in reserve.
The new regulations, called Basel III, are designed to prevent another financial crisis.
At the close of play in New York, the KBW US bank index was 3.1% higher, with JPMorgan Chase up 3.4% to $41.12, while Bank of America rose 3% to $13.95.
In London, HSBC gained 3% and Barclays was nearly 1% ahead.
Shares in the part-nationalised UK giants Lloyds Banking Group and Royal Bank of Scotland rose by 3% and 2% respectively.
In France, Credit Agricole, Societe Generale and UniCredit rose between 2.9% and 5.8%.
Earlier, shares in Japanese banks had closed higher.
"It's [the new rules] a mixed blessing for the banks, but I'm sure investors will be happy to get some clarity and allow the market to move on," said Robbert Van Batenburg, head of equity research at Louis Capital Markets in New York.
"The best thing is it removes the uncertainty that was hanging over the market. The markets should take this favourably."
The new rules state that the amount of common equity - the best capital for absorbing losses - that banks have to hold will rise from 2% of their loans and investments to 7%.
The 7% includes a 2.5% "conservation buffer" to protect banks against periods of difficulty or stress.
If banks' capital ratios fall below 7%, regulators may place restrictions on their ability to pay dividends and bonuses.
The biggest banks - whose failure could bring down the entire financial system - will have to hold even more capital.
The agreement, due to come into effect from 2013 and be phased in over several years, still needs to be ratified by the heads of government of the G20 group of nations at their summit in November.
The EU's Internal Market Commissioner, Michel Barnier, said that the transition period for introducing the rules was "the right one".
"It is sufficiently long to allow for gradual improvements and hence not put economic growth in danger," he said.
Mr Barnier also said the European Commission would propose new laws in the first three months of 2011 to comply with the Basel regime.
Meanwhile, Josef Ackermann, chief executive of Deutsche Bank, said the changes were "challenging but right".
"We support them with all our means. All the numbers [of Basel III] are broadly in line with what we expected," he said.
Mr Ackermann was speaking at a news conference a day after Deutsche Bank said it would raise 9.8bn euros (£8.1bn; $12.4bn) to take over German retail bank Postbank.
"We have absolutely no need for further capital in order to comply with the Basel III regulations," he said.