UK's response to virus helps European banks recover from record lows

By Sinead Cruise and Thyagaraju Adinarayan

LONDON (Reuters) - European banks took heart from the Bank of England's plan to defend Britain's economy from the effects of the coronavirus outbreak, pushing stock prices up and the cost of insuring against default down.

The move raised expectations for a similar response from the European Central Bank on Thursday, driving the euro zone banks index <.SX7E> 1.5% higher and putting them on track for their first gain in two weeks.

Banks had gained as much as 6% earlier on Wednesday but gave up most of those gains after U.S. stock markets opened sharply lower.

Britain's Chancellor of the Exchequer, Rishi Sunak, said he would do whatever it took to protect the UK economy from the global epidemic, shortly after the BoE slashed interest rates and gave banks permission to tap capital reserves in a stimulus package aimed at thwarting recession.

Though lower interest rates typically hurt bank profits, fiscal stimulus to combat the economic effects of the coronavirus helped boost their shares.

"The pressure is on the ECB and EU to deliver a coordinated stimulus response to offset the weakness from the COVID-19 and future lockdowns similar to the one currently in Italy," said Peter Garnry, head of equity strategy at Saxo Bank.

Weighed down by low or negative interest rates since the 2008 financial crisis, euro zone banks have lost more than 80% of their value from 2007 peak.

"The meeting of Central Bankers tonight is a very welcomed step and if a globally co-ordinated response from monetary and fiscal authorities emerges, it will go a long way to assuaging the markets' current fear," said Michael Browne, co-manager of the Legg Mason Martin Currie European equity long/short strategy.

The costs of insuring exposure to European bank debt also fell for all major banks, including Italy's Unicredit <CRDI.MI> and Intesa Sanpaolo <ISP.MI>, the lenders most exposed to the European epicentre of the coronavirus.

Five-year credit default swaps for Italy's largest banks dropped by 6 basis points and 5 basis points respectively.

Elsewhere in Europe, there were other signs policymakers were ready to support the continent's banks.

German Finance Minister Olaf Scholz is due to meet chief executives of Deutsche Bank <DBKGn.DE> and Commerzbank <CBKG.DE> on Friday to discuss measures to soften the impact of the outbreak, sources said on Wednesday.

Graphic: Euro zone banks' share performance https://fingfx.thomsonreuters.com/gfx/buzzifr/15/8943/8943/Pasted%20Image.jpg

(Reporting by Sinead Cruise and Thyagaraju Adinarayan in London, editing by Larry King)