Banks’ shares jump after Basel rules prove softer than feared

UK BANKING stocks have made big gains after global rules aimed at preventing a repeat of the 2008 financial crisis proved softer than investors had initially feared.

The changes, which complete an update of the world’s financial rule book, known as Basel III, were agreed at a meeting of international financial regulators in Frankfurt late yesterday. They aim to stop big banks “gaming” the system and ensure they hold enough capital to survive a crash.

But after a year-long deadlock, the Basel Committee on Banking Supervision, which devises the rules, set lower capital requirements than originally envisaged in order to win the approval of sceptical nations, including France.

Lloyds led the banking stocks rally on the FTSE 100, its share jumping 3.6pc. Barclays also rose strongly, up 2.5pc, while RBS and HSBC shares ticked up 2.1pc and 1.0pc respectively.

The key new rule is a so-called “output floor” preventing banks from risk weighting an asset too far below the level calculated by regulators under standardised models. This floor was set at 72.5pc – lower than was expected.

Lenders with a lot of mortgages on their books – which the banks judge to be lower risk than regulators believe – were a key target of the Basel changes. Lloyds was a big winner as its large mortgage book was spared more onerous risk calculations. Big banks also won a major concession by delaying the rules kicking in by three years, to 2022. They will then have another five years to implement the changes, taking them up to 2027. Daniele Brupbacher, analyst at UBS, thinks lenient Basel rules will be a fillip for bank investors. “We expect a certain relief for the sector overall, particularly for those banks that will soon be able to pay attractive dividends,” he said.

In July, UBS forecast the Basel changes could mean a 1.9pc increase in core capital requirements for lenders. Instead, the European Banking Authority said yesterday that it had calculated the impact would be just 0.6pc.

“When the next crisis will be is hard to foresee, but the present system is much more resilient than the one we saw before the crisis,” said Mario Draghi, the European Central Bank president, who also leads the supervisory board of the Basel Committee.

Wiliam Coen, fellow Basel Committee member, defended the strictness of the rules and said they will make the financial system safer by “reducing variability” and catching out “outliers”.

The Basel Committee hopes its changes will boost competition by helping smaller banks, which had to hold proportionally more capital under the old system.

Paul Lynam, of challenger bank Secure Trust, welcomed the changes. “The very significant changes announced will, over time, dramatically reduce the capital advantages enjoyed by the systemic banks relative to the smaller banks,” he said.