Weaker commodities drag down European equities

European equities fell ahead of the results of a US Federal Reserve meeting yesterday, with commodities coming under pressure due to weaker crude and metal prices, but banks gaining ground, led by UniCredit. The FTSEurofirst 300 index of top European shares provisionally closed 0.8 per cent lower at 710.08 points after falling as low as 702.31 points. The benchmark has declined 14 per cent so far this year after plunging 45 per cent in 2008.

Commodity stocks were among the top losers as crude oil prices fell two per cent, gold slipped more than three per cent, aluminium was down 1.3 percent and zinc lost 2.8 per cent.

Royal Dutch Shell, BG Group, Repsol, Total and StatoilHydro shed between 1.4 per cent and 3.1 per cent.

"We are in a bottoming out process which might involve a further spike down, but people are beginning to look ahead to less bad times," said Andrew Bell, head of research at Rensburg Sheppards.

"There are some signs that it's not quite as bad as it has been in recent history, but less bad does not mean good."

Banks were mostly higher. UniCredit jumped 19 per cent after net profit beat consensus, Barclays was up 5.2 per cent, Royal Bank of Scotland gained 4.1 per cent and Société Générale rose 3.9 per cent.

Across Europe, the FTSE 100 index was down 1.4 per cent, Germany's DAX was up 0.2 per cent and France's CAC 40 was down 0.3 per cent.

Meanwhile Britain's financial regulator yesterday warned that banks will have to retain more capital in future, curtailing their ability to make bumper profits in boom times, but making them less toxic to the global economy when things go sour.

In a landmark report aimed at identifying ways of preventing a repeat of the global banking crisis, the Financial Services Authority (FSA) also called yesterday for a new European banking regulator, and urged G20 leaders to deliver on promises to create an early-warning system for the global economy.

The report, commissioned by Prime Minister Gordon Brown at the height of the banking meltdown last October, suggested banks hold a minimum core tier one capital ratio of seven per cent during the peak of the economic cycle.

The ratio, a key measure of financial strength, is currently set at 4 percent under British and international guidelines.

That would make banks less profitable, but would equip them to weather storms such as the credit crunch, which has in the past 18 months caused the collapse of Wall Street giants Lehman Brothers and Bear Stearns, and triggered the full or partial nationalisation of five major British lenders.

"There is a strong prima facie case that minimum bank capital requirements should in future be significantly above those which have applied in the past," FSA chairman Adair Turner said in the report.

"The future world of banking probably will and should be one of lower average return on equity but significantly lower risk to shareholders as well as to depositors."

Shares in British banks fell following the report's publication, with traders saying concerns over tighter regulation had added to the air of gloom after a record jump in those drawing unemployment benefit in Britain.

The FSA also proposed that banks build up their capital reserves during boom times, creating a buffer that can be run down when the economy shrinks and give them the flexibility to continue lending through the downturn.