Global regulators will give banks a grace period before forcing them to implement stricter capital rules, three people said on Wednesday, easing concerns that lenders might need to issue massive amounts of shares in the near future.

Shares of major Japanese banks surged on the news, with Mizuho Financial Group Inc <8411.T> and Sumitomo Mitsui Financial Group Inc <8316.T> both gaining more than 14 percent.

European bank shares <.SX7P> rose 1.3 percent on relief that banks would have more time to adjust to new rules being drafted by the Basel Committee on Banking Supervision, made up of central bankers and regulators from nearly 30 countries.

The committee is expected to publish proposals this week for stricter financial regulations in response to the credit crisis. There had been fears that if banks implement the new rules quickly, they would have to raise substantial capital.

The three people with knowledge of the matter said the committee would stick to its plan to gradually implement changes starting in 2012, but will give banks a transition period to help them adjust to the rules.

Regulators do not plan to set a specific time frame for the transition period, said the sources who were not authorized to speak publicly on the matter. Japan's Nikkei newspaper said it would be at least 10 years.

The Basel II regulatory changes introduced in 2004 came with 10-year transition periods for some requirements.

Goldman Sachs has estimated that Mizuho, Japan's second-largest bank by assets, and third-ranked Sumitomo Mitsui would need to raise a combined 2.7 trillion yen ($30 billion) to meet the coming global standard for capital levels.

This means there's no reason to rush into financing, said Mitsushige Akino, a chief fund manager at Ichiyoshi Investment Management.

There was some talk that Mizuho might find it extremely hard to carry out financing, and some even thought they might have to accept public funds. So that kind of risk has diminished.

A European policymaker involved in the discussions said there was a strong consensus on other controversial points, such as the definition of liquid assets and core capital, adding that the committee would take a broader view on this than it had earlier.

Other expected changes include lifting the minimum capital ratio for global banks, requiring them to increase their buffers for future losses.

A spokesman for Japan's Financial Services Agency, Motoyuki Yufu, said no such agreement had been reached. A spokeswoman for the Bank for International Settlements, which hosts the Basel Committee secretariat, had no immediate comment.

CAPITAL RULES EYED

Germany's Deutsche Bank AG and Commerzbank AG gained 4.8 percent and 7.1 percent, respectively, as investors bet on banks having more leeway to report sound profits in the shorter term.

A transition period of at least 10 years to implement the new regulation ... is positive as a faster transition period until 2013 was expected, DZ Bank equity research analyst Matthias Duerr wrote in a note to clients.

A delay in stricter banking regulations eases concerns that banks will need to raise capital. A long time frame enables banks to meet higher capital requirements through retained earnings. Therefore, the banks do not have to issue new capital to meet regulation which is positive.

Japanese regulators have been pushing the Basel committee to take a more flexible approach to capital standards to make it easier for Japan's biggest banks, which are seen as having some of the worst capital ratios in Asia.

Unlike rivals elsewhere, Japanese banks have raised funds in recent years by issuing preferred shares or preferred securities, which are unlikely to be included in the committee's definition of core Tier 1, a measure of financial strength.

Analysts expect banks will be required to have a core Tier 1 ratio of at least 4 percent, to protect them from another downturn.

The European policymaker said the Basel committee was set to take a broader view on which assets would qualify as liquid assets and core capital, though not as broad as some would like.

It's going to be conservative in terms of what is a liquid asset, but the Basel committee is going to take a broader definition in its consultation paper. It won't necessarily be restricted to cash and government bonds, the source said.

Can securities with tax-deductible coupons be excluded or recognized as core Tier one? The committee is more open in the document, but it's subject to further analysis.

Japanese banks, on average, have had the lowest risk-adjusted capital ratios of all big global banks.

Mitsubishi UFJ Financial Group Inc <8306.T>, Japan's biggest bank, is issuing new shares to raise 1.03 trillion yen to meet such standards. Analysts have long said that Sumitomo Mitsui and Mizuho need to follow suit.

The banks still need capital. The key point here is the very long transition period, said Jason Rogers, a credit analyst at Barclays Capital in Singapore.

Japan's banking index <.IBNKS.T> jumped 7 percent on Wednesday.

U.S. banks would comply with the new rules as they have already strengthened their capital levels over the last year following the financial meltdown, said Richard Bove, an analyst at Rochdale Securities.

By any standard, banks in the United States are massively overcapitalized at the moment. These new rules would not create any stress in the American banking system, Bove said, adding bank capital as a percentage of assets was at its highest level since 1934 in the United States.

(Additional reporting by David Dolan and Elaine Lies in Tokyo, Krista Hughes and Christoph Steitz in Frankfurt, Sven Egenter in Zurich, and Juan Lagorio in New York; editing by Michael Watson, Hugh Lawson and Jeffrey Benkoe)

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