This article has been adapted from our sister site across the pond, Fool UK.
Better times for Lloyds Banking Group (NYSE: LYG ) may lie around the corner. The reason? A long-awaited announcement from the international Basel Committee on Banking Supervision, which effectively loosened the strict capital and liquidity requirements it had initially said it would recommend that banks hold.
And this is good news for banks that formerly stood to have to bolster their balance sheets to the greatest extent -- for which, of course, read Lloyds, Royal Bank of Scotland (NYSE: RBS ) , and (to a lesser extent) Barclays (NYSE: BCS ) .
The price of Lloyds shares, for example, has risen 20% in just a week. Put another way, earlier this week, the shares closed above 72 pence, a price (adjusting for the effect of the rights issue) that they haven't seen since January 2009.
The rise in the price of Royal Bank of Scotland shares hasn't been as significant, but even so, 11% isn't to be sniffed at.
Talking tough
The Basel committee is part of the Swiss-based global finance institution the Bank for International Settlements, part of the world's financial infrastructure.
And in the wake of the onset of the credit crunch and collapse in banking confidence in mid-2007, the committee had been tasked with coming up with new, tougher stipulations on the minimum amounts of capital and liquidity that banks must hold.
And as recently as last December, explains Simon Hills, executive director for prudential capital and risk at the British Bankers' Association, some of those requirements gave cause for concern.
"We were broadly supportive but had several reservations in terms of the specifics," he says. The problem? Simply put, quibbles over what sort of assets counted as tier 1 capital -- and what didn't -- and concerns as to how liquidity was defined and measured.
Lloyds, for example, couldn't count as capital its unconsolidated investments in other financial institutions, such as Scottish Widows and Clerical Medical.
Swiss cheer
Monday's announcement eases such concerns, Hills says. The committee wasn't in complete agreement, he stresses: Germany still has reservations, and more work is required on timing and definitions.
But the shape of things is clear, he says, and it's good news for British banks. Lloyds, for instance, can now count as capital up to 10% of its holdings in other institutions.
That said, every British bank passed the -- somewhat maligned -- European stress tests, the results of which were released late on July 20. And every British bank has had to comply with the FSA's tougher stress test of just over a year ago, which was predicated on something of an economic "nuclear winter."
On the turn
Several analysts reckon that Lloyds stands to benefit most from the Basel committee's relaxed requirements, with both Deutsche Bank's Jason Napier and Evolution's Arturo de Frias Marques being quoted as citing the stock as a "buy."
In short, higher profits, lower levels of impairment, and a reduced need to bolster the balance sheet all beckon. Lloyds shares -- 69 pence at the time of writing -- could reach 95 pence, it's claimed.
Will they? Time will tell. But I've always regarded the HBOS acquisition as a significant opportunity, even though I do believe it could have been carried out better. It's why I bought into the rights issue and why I continue to hold.
At some point, of course, the government will sell its 43% stake in the business -- which is currently tantalizingly short of the 73 pence per share average price that it paid. That's something of an unknown, and will doubtless depress the price for a while. The forced asset sale, too, sees some of that expensively acquired value dissipated, at a still-unknown price.
But the fundamentals of the business continue to improve, and this week's Basel news is one more piece of a jigsaw puzzle that eventually builds up to quite a reasonable picture.
Dividends should return early next year, albeit on a reduced scale. Lloyds shareholders have had a torrid three years, but the corner appears to be turned.
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