London-listed banks rallied after global regulators reached a deal on Basel III reforms that many analysts said will have less of an impact on capital requirements than the market had feared.
Global regulators in the Basel Committee ended a year-long deadlock on Thursday by agreeing a deal on the bank capital rules, which were introduced following the 2008 financial crisis.
The European Banking Authority said the agreement will decrease the weighted average common tier equity 1 ratio – a measure of capital strength for banks – of European Union lenders by 0.6 percentage points compared to the status quo.
It said the rules will have a limited aggregate impact on regulatory capital ratios and capital shortfalls.
Shares in Lloyds Banking Group PLC (LON:LLOY), Royal Bank of Scotland Group PLC (LON:RBS) and Barclays PLC (LON:BARC) and HSBC Holdings PLC (LON:HSBC) gained as analysts said the outcome was overall positive.
Basel IV a 'big positive', says Citi
Citigroup said the reforms were a “big positive” for all European banks, which should be able to quantify excess capital and budgets for mergers and acquisitions in due course.
"While we expect it to be a while before the market can fully quantify the impact o the new ‘Basel IV’ reforms, at first glance this appears to be a far better outcome than we and the market had feared," it said.
“We previously modelled a far greater impact to capital ratios, albeit front loading the impact to today and on more onerous assumptions.
“The reason for the better outcome appears to mainly be due to: (1) Lower standardised risk-weights, (2) National discretion on operational risk multipliers.”
The reforms include new curbs on how banks determine their capital requirements for risks on investments, mortgages, loans and other assets.
It will prevent big banks from using their own risk calculations to justify holding less capital.
Reforms delayed, challenger banks to benefit
However, banks will have plenty of time to adjust as the rules have been delayed by three years to 2022. Banks will then have another five years to implement the changes, taking them up to 2027.
The Basel Committee said the changes will improve competition by helping smaller banks, which usually need to hold proportionally more capital under the old rules.
“Relative to our expectations, the proposals appear somewhat less onerous than we had feared reflecting the extended period for implementation, particularly in respect of the output floors, and the moderation in the proposed risk weights for buy-to-let mortgages,” said Shore Capital analyst Gary Greenwood.
“We also think that the revised rules will help to narrow the gap in capital requirements between the larger mainstream banks and smaller challenger banks, thus helping to create a more level playing field over the longer-term. In relative terms, this is therefore good news for the smaller challenger banks.”
Operational risk the 'main positive', says Deutsche Bank
The minimum tier 1 capital requirement will on average fall by 0.5% for the Group 1 category of international banks with capital of more than €3bn but will increase by 3.8% for all other lenders.
The minimum operational risk capital requirements have been reduced by 25.0% for Group 1 banks and by 30.2% for so-called global systemically important banks (G-SIBs), including RBS, Barclays, HSBC and Lloyds, while there is an increase of 6.9% for the rest of banks.
Deutsche Bank said the main positive was the revision to operational risk and lowered its estimated CET1 ratio hit to 140 basis points (bps) from the 240bps previously expected.
The bank said it believes the agreement is “supportive for French, investment and UK banks due to the revised operational risk”.