Bank capital shake-up seen moderate, shares up

FRANKFURT/DUBLIN (Reuters) - A growing confidence that new bank capital rules are unlikely to be as stringent as many feared, and will allow years to implement change, buoyed European bank stocks on Thursday.

New capital rules -- dubbed Basel III -- to make banks resilient enough to cope with another financial crisis are due to be laid out on Sunday after international regulators worked out a compromise deal to put to central banks.

Banks will need to have a minimum core Tier 1 capital ratio of 7 to 9 percent, including a capital conservation buffer, officials and regulatory sources have said.

That would include a minimum base core Tier 1 capital ratio of 4.5 to 6 percent and an additional capital conservation buffer of 2 to 3 percent. Any bank that fails to keep above the buffer would have to curb payouts such as bonuses and dividends.

"There seems to be a consensus building around 7 percent core Tier 1 ratio and the market is pretty well there already, in fact it's comfortably above it in many cases," said Chris Wheeler, bank analyst at Mediobanca.

"If we had a stronger economy and the markets were more robust then the regulators would probably be tougher, but you've got to balance the two and the risk of putting in jeopardy what is still a fragile recovery would not be a great idea," Wheeler added.

European bank shares were up 2 percent by 1430 GMT, helping recover losses sustained earlier this week.

There were reports earlier this week the minimum capital levels would be higher, and earlier this year banks were facing a far tougher crackdown after a backlash against the industry.

"We think that the Basel III rules will be less harsh for the banking sector than feared 6-12 months ago," Andreas Zoellinger, co-manager of the BlackRock Euro-Markets Fund, told Reuters in an interview on Thursday.

As a result Zoellinger said his fund had shifted its underweighting of the banking sector in early July.

Top banks are not expected to rush to raise funds, although there remain worries that banks in some countries face a long road to recovery and the changes will crimp lending.

Ireland's efforts to contain the damage from struggling Anglo Irish Bank and Germany's Commerzbank warning it may have to raise capital showed that troubles will persist.

Commerzbank, Germany's second largest, said on Thursday it may need to raise new equity and take other steps as it aims to repay almost 20 billion euros ($25.41 billion) it owes to the government.

"It will most likely not be one flower but a bouquet," Chief Executive Martin Blessing said of the steps required if the bank is to meet its repayment target of 2012.

A day earlier, European Central Bank Executive Board member Juergen Stark warned German lawmakers that the country's banks were undercapitalized, comments which hit the euro.

With Irish taxpayers out of pocket, Finance Minister Brian Lenihan faced increasing pressure to spell out how the government would contain the problems of nationalized Anglo Irish, a concern that dented demand for Irish Treasury bills on Thursday.

LENDING SQUEEZE?

Deutsche Bank board member Juergen Fitschen told bankers gathered in Frankfurt the risk of a credit crunch in the real economy had not abated, noting rising demand for loans spurred by a rebound from the global financial crisis.

"I presume that tensions will rise as demand for credit rises. I'm not convinced there won't be a squeeze in demand for credit," Fitschen said.

Economists fear that recovery in Europe's biggest economy and elsewhere will be stifled this year as banks keep more capital and limit lending to comply with the new rules.

Yet regulators are confident that the new Basel capital rules will improve financial system stability without hurting lending.

"An ambitious reform, which is given a long enough transition period, can deliver a financial system that is more sustainable than the current without restricting banks' lending ability too much," ECB Governing Council member Erkki Liikanen said.

(Additional reporting by Arno Schuetze, Christoph Steitz, Andreas Rinke and Josie Cox in Frankfurt; writing by Steve Slater; Editing by Jason Neely, Huw Jones and Elaine Hardcastle)