LONDON French bank stocks helped lead a sector-wide surge on Monday after regulators softened and delayed new liquidity rules, easing pressure on lenders to conform and potentially giving some a big profit boost.
Europe's banking index .SX7P was up 1.6 percent at 172.4 points by 1000 GMT, after racing to 173.7, its highest in 17 months. French lenders BNP Paribas (BNPP.PA) and Credit Agricole (CAGR.PA) rose more than 2 percent and there were similar gains in Italy's Unicredit (CRDI.MI), Britain's Barclays (BARC.L) and Germany's Deutsche Bank (DBKGn.DE).
Global regulators on Sunday gave banks four more years and greater flexibility to improve their funding positions, due to fears that a draconian earlier draft would have choked economic recovery.
The pullback from the original liquidity coverage ratio (LCR) draft went further than many analysts had expected.
Most banks should have no problem meeting the easier standards when they are phased in from 2015 and will have time to build up to full implementation in 2019, which could have been a challenge for some major French and German banks and others in the euro zone, analysts said.
"The announced changes represent a more significant relaxation of the contentious new liquidity rule than had been anticipated," said Michael Symonds, credit analyst for financials at Daiwa Capital Markets Europe.
"The more pragmatic approach from regulators is warranted ... the easing recognises that the torrent of new regulation originating from the first phase of the financial crisis has somewhat weighed on economic recovery, in particular in Europe," he said.
Banks like Societe Generale (SOGN.PA), Credit Agricole and Commerzbank (CBKG.DE) had faced having to build up far bigger holdings of low-risk and low-yielding government bonds, so the relaxation in rules should cut the increase in interest rates they faced.
Stronger banks should benefit too, as they can reduce the surplus liquidity they hold, allowing them to cut interest costs by shifting from cash or governments bonds into assets that pay higher interest.
Barclays, for example, had a liquidity pool of 160 billion pounds at the end of September, giving it an LCR of just below 100 percent under Basel III rules. Under the relaxed rules, 30 billion pounds of that could be considered surplus liquidity and could release about 300 million pounds in annual interest costs, analysts at Espirito Santo estimated.
Banks had complained they could not meet the January 2015 deadline to full comply with the new rule on minimum holdings of easily sellable assets and at the same time supply credit to businesses and consumers.
As well as delaying implementation, the Basel Committee widened the range of assets banks can put in the buffer to include shares and retail mortgage-backed securities (RMBS), as well as lower-rated company bonds.
(Reporting by Steve Slater, Simon Jessop and Francesca Landini; Editing by David Holmes)