GLOBAL MARKETS-Italian bank worries leak into second week
* Speculation of early Italian election after weekend reports
* Barclays needs to raise 12.8 bln stg, taps investors for 5.8 bln
* Deutsche has earmarked 250 bln euros of assets that could be cut
* Investors fear more banks will need to raise capital
* Fitch says mid-sized Italian lenders likely to need more equity
* UBS draws a line under its 2008 bailout with fund buyback
By Steve Slater and Edward Taylor
LONDON/FRANKFURT, July 30 A $9 billion rights issue and a fresh purge of assets are among the measures Britain's Barclays and Germany's Deutsche Bank announced on Tuesday to meet tougher rules on risk, raising concern among investors that regulators will push other European banks into similar action.
Unlike their U.S. rivals, which were quickly restructured and recapitalised in the heat of the financial crisis, Europe's banks are still trying to extricate themselves from the legacy of 2007-09, with regulators in Britain and on the continent worried that some of them are still too big to fail.
"If Barclays needs to raise that much capital, and it was relatively well capitalised by European standards, it suggests we've got a long way to go in Europe," said the head of equities at one UK fund manager.
"We'll see this creep in Europe, moving the bar higher and higher to get to where the regulators want to go, and we've still got a long way to go in terms of capital raising."
Barclays bore the brunt of a surprise new British curb on banks' risk exposure, requiring it to raise an extra 12.8 billion pounds of capital in the next year.
To meet the new target, Britain's third-largest bank by market value said it would tap shareholders for 5.8 billion pounds, shrink its loan book by 65-80 billion pounds and sell 2 billion pounds' worth of bonds, sending its shares sliding over 7 percent.
Tougher rules on risk can discourage lending, and Britain's business minister accused the Bank of England last week of holding back economic recovery by imposing higher capital requirements.
Standard Life, one of the biggest investors in Barclays and the UK stock market, criticised regulators for a "lack of stability or consistency".
The regulatory regime "appears both capricious and hostile to banks and is in consequence raising the cost of capital for the banking sector," said David Cumming, head of equities at Standard Life Investments.
In the euro zone, national regulators are pushing banks to get their houses in order before the European Central Bank takes over direct supervision of the bloc's largest banks next year.
Fitch rating agency said on Tuesday that Italian mid-sized banks are likely to have to raise more equity to offset capital pressure because of a deep recession and rising bad debts. The Bank of Italy has already extended inspections of bad loans at 20 of the country's banks.
Deutsche Bank, which has already raised around 5 billion euros in new debt and equity, said it had earmarked an additional 250 billion euros in assets, roughly equivalent to the annual economic output of Denmark, that could be cut to meet new bank safety rules.
Its shares closed down 3.9 percent, underperforming the European banking index, which slipped 0.24 percent.
In addition to pressure on capital, European investment banks are involved in a number of regulatory inquiries including a global investigation into manipulation of benchmark interest rates and the mis-selling of mortgage-backed bonds in the United States.
In Frankfurt, Deutsche Bank set aside an extra 630 million euros to cover claims and settlements, causing it to miss quarterly profit expectations.
Even when banks settle with regulators, they still face further lawsuits from other parties.
Barclays and Swiss bank UBS, which have already paid out nearly $2 billion over their role in the manipulation of benchmark interest rates, were named in a lawsuit by the city of Philadelphia in connection with the scandal, along with Deutsche and a host of other banks.
Barclays also set aside another 2 billion pounds to cover compensation claims arising from mis-sold products in Britain.
UBS BRIGHT SPOT
In one of the few bright spots for European banking on Tuesday, UBS said it would buy back a fund set up to purge it of toxic assets during the financial crisis. This drew a line under its humiliating state bailout in 2008, boosting its capital and raising the prospect of an early increase in dividends.
UBS beat second quarter profit forecasts despite paying a $885 million fine to settle a lawsuit with the U.S. housing regulator over its role in the sale of mortgage-based securities.
UBS's second-quarter performance was driven by buoyant equity markets. Its decision to pull out of most areas of fixed income meant that, unlike Deutsche Bank, it was not hit by a drop in income from debt trading in the latter part of the second quarter after the U.S. Federal Reserve signalled an end to cheap money.
Leaving aside the litigation charge, Deutsche's investment bank underperformed U.S. rivals such as Goldman Sachs and Morgan Stanley. Revenues from its investment bank rose 9 percent, compared with double-digit gains on Wall Street.
In Spain, Santander's core capital ratio, a measure of its capital strength, rose partly due to a reduction in lending, underlining the risk for regulators that the push for greater capital levels could further choke the supply of credit and hurt the wider economy.
Austria's Erste Bank has already met new global standards for capital and said it was more concerned that growth return to its core markets in central and eastern Europe.
"We belong to the best capitalised banks in Europe," Chief Executive Andreas Treichl told a news conference. "All we need is growth," he said.
* Speculation of early Italian election after weekend reports
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