European stocks were higher on Monday afternoon, up for the fifth time in six sessions as banking stocks surged following a report that France and Germany were calling for a relaxation of global bank capital rules to prevent a credit crunch.
The FTSEurofirst 300 index of top European shares was up 0.4 percent at 1,047.06 points at 1225 GMT, while the euro zone's blue chip Euro STOXX 50 index was up 0.7 percent at 2,442.82.
The Financial Times said French finance minister Francois Baroin and his German counterpart Wolfgang Schaeuble will say elements of Basel III guidelines on capital requirements should be watered down to mitigate any negative effect on growth.
Schaeuble denied the FT story, telling journalists in Paris that the two countries would implement Basel III rules.
Easing the capital rules would give banks and insurers the kind of breathing space they need to really recover. That totally makes sense, a Paris-based trader said.
Among individual stocks, Commerzbank was up 10.6 percent, Societe Generale up 9.2 percent and UniCredit up 11 percent.
Traders also cited Bank of France data showing French banks increasing their long-term borrowing from the European Central Bank by 43.6 billion euros ($56 billion) over the past month, taking advantage of cheap funding.
The French lenders, which have some of the biggest exposures to crisis-hit euro zone countries such as Greece and Italy, had borrowed 107 billion euros in long-term ECB funds as of Jan. 17, up from 63.4 billion at Dec. 13 2011, the data showed.
The fresh funds would more or less cover 2012 financing needs for top listed banks BNP Paribas, Credit Agricole and SocGen, or around 45 billion euros, according to Deutsche Bank research.
UBS said in a note on Monday it has upgraded its stance on global equities to 'overweight' from 'neutral' as risks to economic growth and the stability of the financial system have abated, and recommended using any pullback in share prices as an opportunity to add risk.
As double-dip and financial risks fade, risk premiums should fall to reflect a more stable backdrop, allowing higher PE (price-to-earnings) multiples, even as earnings growth slows, UBS strategists wrote in a note.
BANK STOCKS BOOM
It seems that French banks have not played the carry trade but rather secured their 2012 refinancing needs, Deutsche Bank analyst Flora Benhakoun said in a note.
After a dismal performance in 2011, the STOXX euro zone bank index has jumped 26 percent over the past two weeks -- with UniCredit up 62 percent, Commerzbank up 57 percent and SocGen up 53 percent -- propelled by mounting hopes the euro zone debt crisis was being brought under some degree of control.
It has been quite a nice rally. We have turned positive on stocks in December, and we are starting to book profits now ahead of the outcome from the Greek debt deal, said David Thebault, head of quantitative sales trading at Global Equities.
The market might have gotten a bit ahead of itself, rallying despite the absence of real positive news. We will wait for the deal before coming back into equities.
After several rounds of talks, Greece and its private creditors were close to a deal in which private bondholders would take a loss of 65-70 percent on Greek bonds they hold, according to officials close to the negotiations.
RIPE FOR SHORT-TERM PULLBACK
The Euro STOXX 50, up 18 percent since a low in late November, was facing major resistance on Monday at 2,472 points, representing its 200-day moving average. The benchmark index's 14-day relative strength index, a widely used momentum indicator, was getting close to overbought territory on Monday.
Investor appetite for stocks has greatly improved over the past weeks, with the Euro STOXX 50 volatility index -- Europe's yardstick of investor sentiment, known as the VSTOXX -- dropping to a near six-month low.
Around Europe, Britain's FTSE 100 index was up 0.7 percent, Germany's DAX index up 0.4 percent, and France's CAC 40 up 0.6 percent.
Shares in sectors seen as defensive, such as utilities and pharmaceuticals, were being dumped by investors, with GDF Suez down 2.8 percent, E.ON down 1.5 percent and Roche down 0.8 percent.