Lloyds Share News (LLOY)

* Banks in Europe shrinking to meet tough capital rules * Regulatory uncertainty puts banks off snapping up bargains * Private equity and hedge funds stepping in to buy * Investors fear Basel III will not be the final word By Carmel Crimmins and Steve Slater DUBLIN/LONDON, Dec 21 (Reuters) - Regulatory uncertainty isputting large banks off buying the assets of smaller rivals,complicating the sector's restructuring and giving hedge fundsand private equity a golden opportunity to swoop in. Banks are facing a regulatory crackdown in the wake of thefinancial crisis, with national regulators increasingly optingto go it alone with stricter rules, creating confusion forlenders trying to calculate the merits of buying a rival'sassets and for fund managers running the slide rule over bankstocks. "The regulatory environment is such that you are seeingincreasing capital standards for banks, but we don't know yetwhere they are going to," said Niall Gallagher, manager of theGAM Star Continental Europe Equity fund. "There's a lot of investor angst out there at the moment,and unless you have a crystal clear view, it is very hard toinvest in these stocks." Despite hundreds of billions of euros' worth of loans forsale in Europe, senior bankers complain that they can't get somedeals past their credit committees because there is uncertaintyover how much capital they would need to hold after theacquisition. "We are looking at assets. But the regulatory uncertainty ismaking us wary," said one senior U.S. banker. With investors reluctant to plough more money into bankshares, lenders are under huge pressure to shrink their bloatedloan books - by running them down or selling them - to meettougher capital requirements. Europe's banks, including Royal Bank of Scotland,Lloyds, Commerzbank and others in Ireland,France, Spain and beyond, have shed hundreds of billions ofeuros since 2008 but still have further to go than their U.S.rivals because they grew so much during the boom. The IMF has estimated banks will shrink by $2.8 trillion,but in an extreme scenario that could reach $4.5 trillion asfirms rid themselves of unwanted loans and "rightsize" for alower growth environment. With their loan books still bloated, European banks arecapping new lending to shore up capital. Weak credit growth has already hit the European economyhard, with the IMF warning earlier this year that deleveragingwould squeeze credit availability in the euro area by 1.7percent over the next two years. PricewaterhouseCoopers (PwC) has estimated that Europeanbanks have more than 2.5 trillion euros of non-core loans, orabout 6 percent of their assets. It has estimated about 500billion euros of those loans will trade in the next decade. Banks are only four years into what is expected to be a10-year process of cutting assets. Next year could surpass 2012as the peak for asset sales. Richard Thompson, European portfolio advisory group partnerat PwC, expects a record 60 billion euros of loans will be soldnext year up from an estimated 50 billion this year and 36billion euros in 2011. "It's the opportunity to acquire customers at a relativelycheap price. Some banks will emerge as buyers when they seeassets at relatively competitive prices. But a lot of banks arebeing very cautious on capital," said Thompson. PRIVATE EQUITY BUYERS With U.S. banks facing tough regulatory hurdles onacquisitions in the aftermath of the financial crisis, Canadian,Japanese and Australian banks, which emerged largely unscathedfrom the credit crunch, are the most obvious trade buyers. Japan's Mitsubishi UFJ Financial Group bought U.S.bank Pacific Capital Bancorp for $1.5 billion in February thisyear, while Sumitomo Mitsui Financial bought Royal Bank ofScotland's aircraft leasing business for $7.3 billion inthe summer. More recently, private equity houses have been the buyers,with Apollo Global Management acquiring a 1.47 billion poundbook of troubled Irish property loans at a 90 percent discountfrom Britain's LLoyds. Spanish lender Popular this month finalised thesale of a 1.14 billion euro portfolio of distressed consumerloans to Nordic distressed debt group Lindorff and privateequity firm AnaCap, a source told Reuters. One international investor said a stricter, more uniformapproach to dealing with banks' bad debts across Europe wouldtrigger more asset sales, particularly in Spain, which recentlycreated a so-called "bad bank" to take over the soured assets ofsome banks. "We have been in very, very regular communication with banksin Spain. Our inclination is it is a bit early to do thingsthere," said the investor, who requested anonymity. "They (the Spanish) haven't really worked through the goodbank/bad bank scenario, and there really hasn't beencrystallised yet the framework for pan-European bankingregulation." BASEL IV OR V? Confusion over financial regulation is set to continue asefforts to introduce universal standards for banks go awry. Both the United States and Europe, the world's two largestbanking markets, are delaying the introduction of tougher globalcapital rules for banks, the so-called Basel III accords, whichwere meant to start rolling out on Jan. 1, 2013. While the biggest European and U.S. banks already complywith Basel III's minimum requirements, investors are worriedthat a delay in introducing the new regime will encourage someregulators to devise their own firewalls, leading to a series ofescalating responses. "If you always go for more capital, more safety, moreeverything, then you get into a position where you stopshoplifting by not having any shops," said Robert Hingley,director of investment at the Association of British Insurers,which represents some of the UK's largest investors. The U.S. Federal Reserve has proposed raising the capitalrequirements on foreign banks to ensure they are in line withdomestic lenders. The Bank of England, meanwhile, signalled last month that UKbanks still needed to raise tens of billion of pounds inadditional capital as many of them had underestimated the costof loans going sour and future fines for misconduct. Despite the problems in getting it off the ground, there arealso fears that Basel III will not be the final word. The current accord relies heavily on banks using in-housemodels to assess risks and capital. But with investorsincreasingly wary of the wide variety of methods used, thecommittee that oversaw Basel III is probing these in-housemodels and will report back next year with its findings. "We don't know whether Basel III is it, or whether we'llhave Basel IV or V," said Gallagher.