Global regulators agreed a set of radical new capital rules for banks that could free up stronger lenders to release surplus cash while forcing some laggards to raise funds.
-- New Basel III bank rules not as harsh as lenders feared
-- Rules could lead to divergence between weak, strong banks
-- D.Bank to raise cash, others in Europe, Japan may follow
-- End of process could help dividends
-- Markets should take new rules positively
Banks will have to hold far more capital to make them more resilient to financial shocks - and better quality capital, too. But they will breathe a sigh of relief that there was no sting in the tail to the "Basel III" reform plans announced on September 12.
Banks will need to have a minimum core Tier 1 capital ratio of 7 percent, including a 2.5 percent capital conservation buffer. That's more than three times the current minimum of 2 percent, but lower than banks had feared earlier this year. They will also have years to meet the so-called Basel III reforms.
"It is clear that as a result of concerns about the anemic economic environment, Basel is trying to balance the need for tougher regulation with supporting the banks' inevitable role in the recovery. Hence the long implementation time frame," said Chris Wheeler, analyst at Mediobanca in London.
Top German lender Deutsche Bank is seeking a headstart on its rivals by announcing plans to raise almost 10 billion euros to bolster its capital, and more banks in Germany, Spain, France, Japan and elsewhere are likely to follow suit to meet the new standards.
But Basel III could also be the catalyst for stronger banks to release surplus funds such as by resuming or growing their dividends, and Nordic and Canadian lenders could be first to act.
Robbert Van Batenburg, head of equity research at Louis Capital Markets in New York, said markets should take the news positively.
"I don't think there are any nasty surprises, and there's a time frame to allow for plenty of time to raise capital if needed. The best thing is it removes the uncertainty that was hanging over the market," he said.
The immediate spotlight will inevitably shine on banks in danger of falling below the new capital standards.
The sickest banks during the financial crisis took massive doses of public and private cash medicine - notably big lenders in the United States, Britain, Benelux and Switzerland - and shouldn't need more.
But Deutsche Bank's cash call to raise its stake in Deutsche Postbank and plump up its capital shows there are weak spots.
Germany's 10 biggest banks may need 105 billion euros under the new rules, the country's bank association has said. Commerzbank and several landesbanks could be next.
National Bank of Greece also unveiled a rights issue last week, and analysts say France's Credit Agricole and Societe Generale as well as Irish, Greek, Portuguese and unlisted Spanish banks could all come to the market, too.
Big US banks shouldn't have a major need for cash after raising over $200 billion in recent years to lift their common capital ratios to an average of about 9 percent.
"US banks are going to come through this pretty much unscathed," said Paul Miller, bank analyst with FBR Capital Markets.
But the rules will force many regional US banks to replace portions of their capital funded by hybrid securities, such as trust preferred securities, with common equity.
While banks who need to repay TARP funds, such as Fifth-Third, are seen as most likely to raise capital, among those well-positioned to reinstate higher dividends could be JP Morgan or Wells Fargo, analysts say.
In Asia, Japan's banks have been under most scrutiny as they have lower capital levels than elsewhere. Jitters about the global economy may sway those banks close to the capital buffer zone on whether to jump in alongside Deutsche Bank or bide their time.
A senior investment banker in Europe expects a flurry of modest-sized fundraisings early in 2011, once there is more clarity on the macroeconomic outlook. Investors have cash, but will remain wary of equities until the threat of a double-dip recession fades, he said.
Analysts also warn that although banks have escaped a sharp shock, the new standards, which also included significant reforms of liquidity and funding rules, will depress profitability and returns for years to come.