Loan rate hike mooted

AUSTRALIA’S big banks could again come under pressure to hike home loan rates after they were told to put away more cash to fortify the financial system.

The banks are now expected to set aside up to $83 billion more in emergency reserves – effectively funds they could draw on to unwind operations in case of a collapse.

Under a proposal tabled by the banking regulator yesterday – and broadly received in the industry as a direction – the banks will have to put away the cash to boost their “loss absorbing and recapitalisation capacity”.

The Australian Prudential Regulation Authority said it would “support orderly resolution in the unlikely event of failure”, minimising the need for taxpayer support.

“This will be achieved by adjusting, where appropriate, (a lender’s) total capital requirement,” the regulator said.

The watchdog said the changes would take effect over five years, so they were “not expected to have an immediate or material effect on lending rates”. But it acknowledged the move was likely to “marginally increase each major bank’s cost of funding”.

It comes after all of the big lenders other than National Australia Bank hiked their variable mortgage rates, citing rising funding costs.

Assessing APRA’s announcement, ANZ said it would likely have to increase its capital reserves by $16 billion to $20 billion. Westpac said it expected to set aside $17 billion to $21 billion.

The Commonwealth Bank put its range at $18 billion to $23 billion and National Australia Bank said it equated to an increase in capital of $16 billion to $19 billion.

Westpac added it was “not possible at this point to determine the actual total cost …

given the final details of the rules are yet to be determined”.

The regulator expects banks to use what is known as tier-two capital to cover the new requirement.

“The proposed changes are expected to marginally increase each major bank’s cost of funding – incrementally over four years – by up to five basis points (0.05 percentage points) based on current pricing,” the watchdog said.

APRA chair Wayne Byres said the regulator had to determine the best way to prepare for a well-ordered winding down of a lender if necessary.

“The resilience of the Australian banking system continues to improve, underpinned by the build-up of capital over the last decade,” Mr Byres said.

“However, no matter how resilient financial institutions are, the possibility of failure cannot be entirely removed.

“Therefore, in addition to strengthening the resilience of the financial system, it is prudent to plan for the unlikely event of failure.”

Mr Byres said the events of the global financial crisis had shown “the impact that failures can have ... and the subsequent social and economic consequences”.

The plan is not linked to a separate push by APRA for banks to have “unquestionably strong” capital levels, the regulator saiD.