Europe banks extend rally on state aid, US plan

European bank shares rallied for a second day on Tuesday after a host of European countries pledged to support ailing lenders and U.S. authorities looked set to follow suit, helping fuel a Wall Street surge. By 0725 GMT the Dow Jones European bank index was up 4.1 percent at 237.4 points, lifting the index 14 percent away from a 5-year low 207.8 hit on Friday. UBS, Societe Generale and Danske Bank jumped over 8 percent and Barclays, Deutsche Bank, UniCredit and Credit Suisse each rose 5 percent or more. Royal Bank of Scotland, HBOS and Lloyds TSB surged at the open to recover losses on Monday after news they were getting billions in capital, but gains were trimmed and they were each up about 3 percent. Britain, Germany, Italy, Spain, France and other countries have unveiled plans to inject capital into troubled banks, offering debt guarantees to support liquidity and providing funds to unfreeze interbank lending. "Governments are bailing out, but also toughening up," said Stuart Graham, analyst at Merrill Lynch. He said the measures were positive for Europe's banks and should allow them to start de-leveraging, but there was a lack of detail about how punitive terms will impact some banks. Banks making use of the support will be required to keep more capital, may not pay dividends for years, pay hefty interest on preference shares, will see remuneration held in check and may be constrained on strategic ambitions.