European bank shares were boosted Tuesday by strong earning results, revised Basel rules and the flawed European stress-test results, which were released last Friday.

Swiss banking giant, UBS, closed up 11 per cent after reporting net income of SFr2bn (€1.4bn) in the three months to June, compared with losses a year before while, Deutsche Bank, Germany's biggest, reported a 9 per cent rise in second-quarter earnings as gains at its transaction banking and asset management operations helped offset a weaker investment banking performance. The share price closed up 4.36 per cent. Shares of Greece’s Alpha Bank AE increased 11.3 per cent  while Société Générale and Crédit Agricole of France rose more than 10 per cent each. In New York, Bank of Ireland (ADR) (NYSE: IRE) climbed 9.56% to close at $4.47.  UK bank Barclays, a big shareholder in South Africa’s Absa, rose nearly 8 per cent, after the Basel Committee had agreed to change planned provisions on non-wholly-owned subsidiaries. Another UK bank, Lloyds, is a beneficiary of a modified “net stable funding ratio” rule (see below) and jumped 9 per cent.

The The Basel Committee on Banking Supervision said on Monday that all but one of its 27 member countries had signed up to the new principles, which limit what banks can count as so-called Tier 1 capital - - what can be used to absorb losses. Germany is reported to have delayed a decision on the issue.

The proposals on worldwide liquidity and leverage standards have been modified and some provisions have been long-fingered to at least 2018.

The planned “net stable funding ratio,” that requires banks to match the duration of their liabilities and assets more closely, will be in an “observation phase” until at least 2018

While what can be included in Tier 1 capital has been broadened and later this year, the Committee will set the minimum required ratio of Tier 1 capital to risk-weighted assets. The higher the ratio, the bigger the expected impact on lending capacity.

Jean-Claude Trichet, President of the European Central Bank and Chairman of the Group of Governors and Heads of Supervision, said that "the agreements reached today are a landmark achievement to strengthen banking sector resilience in a manner that reflects the key lessons of the crisis." He emphasised that "the Group of Governors and Heads of Supervision have ensured that the reforms are rigorous and promote the long term stability of the banking system. We will put in place transition arrangements that ensure the banking sector is able to support the economic recovery."

Agreed changes

French banks are staging an impressive rally, with CNBC's Simon Hobbs:

French economist, Nicolas Véron, who is a visiting fellow at the Peterson Institute for International Economics in Washington DC, commented on Tuesday on the European stress tests, saying that on the plus side, there is unprecedented data on sovereign risk exposures, individually and consistently reported by all tested banks except one Greek and six German institutions. The wealth of information adequately addresses investors’ biggest current concern. He said after having repeatedly called a sovereign default out of the question, the authorities could not include one in their stress scenarios, but they have done the next best thing. They have empowered investors to do it in their place. Further good news is that a Greek default appears potentially manageable, with losses spread around the system and unlikely to threaten any key institution outside Greece and Cyprus.

Véron added: "Sadly, bad news abounds too. The most obvious is the conclusion that only €3.5bn of additional equity would be sufficient to make Europe’s banking system sound again. Few will find this credible, even allowing for the improved macroeconomic environment since the US stress tests of May 2009, which had identified a $75bn capital shortfall. The tests’ focus on Tier 1 capital, a questionable measure of strength, is also regrettable, and the argument that other ratios are insufficiently harmonized fails to convince. Supervisors should have tested core Tier 1 under a more severe adverse scenario to compensate for not including the assumption of a sovereign default. Furthermore, they should have provided more disaggregated information by asset class to shed light on risks other than sovereign. On these, the EU disclosure format is much less comprehensive than that of the United States last year, or than the one Spain added on its own initiative."