A heated public battle has erupted between the major banks and the head of the government’s financial system inquiry David Murray over the likely impact of new capital rules.

Mr Murray, a former boss of the Commonwealth Bank of Australia and inaugural head of the Future Fund, has recommended that the country’s four major banks – NAB, ANZ, CBA and Westpac – be required to put aside more cash to cover for lending risks on home mortgages.

The rationale behind the higher capital requirements is to ensure that taxpayers’ money was not used to prop up the major banks in future financial crises and to bring capital obligations of big banks into line with small lenders.

• Murray superannuation recommendations ‘sensible’, with one exception
• Big banks targeted in finance system blueprint
• A blueprint for the next decade
• Read the full report here
• Read the full list of recommendations here

Regional banks and credit unions are presently expected to hold almost double the capital of major banks for writing home loans.

Mr Murray went on the front foot against recent claims by the big banks that borrowers would be hit with higher interest rates on mortgages.

Research commissioned by the financial inquiry found that increasing capital requirements on banks would have a modest impact on home loan costs of around 0.1 per cent.

“The public statements by the banks are wildly above those numbers,” Mr Murray said.

“They are exaggerated.”

Australia’s ‘big four’ banks ANZ, Westpac, Commonwealth Bank and National Australia Bank. Photo: AAP

ANZ chief Mike Smith has warned that any increased capital requirements on major banks would have to be passed on to borrowers in higher interest charges or to shareholders in the form of lower dividends.

“Higher capital costs will come at a cost to customers who will pay more for home lending,” Mr Smith said at the announcement of the bank’s bumper $7.3 billion annual profit at the end of October.

Mr Murray defended his capital recommendations on the grounds that they would establish a level playing field between the major banks and smaller lenders.

“It does not mean rates have to rise,” he said.

On Sunday, ANZ’s deputy CEO Graeme Hodges weighed in to the debate on the capital proposals, saying they appeared inconsistent with the way international banking regulators, such as the Basel Committee, were approaching capital management.

“Increasing risk weights on major banks’ mortgages for competitive reasons appears at odds with Basel’s risk-based approach to regulation,” he said.

Steven Munchenberg, the chief executive of the Australian Bankers’ Association, also would not rule out that major banks might recoup higher capital charges from customers.

However, Mark Degotardi, the head of the Customer Owned Banking Association – the body representing credit unions and building societies – lashed out at ANZ and the other big banks on their threats to hike mortgage rates.

“We urge the major banks to stop exaggerating the impact of higher capital requirements,” he said.

“This is a blatant attempt to bully the government.

David Murray says bank statements on mortgage rates are “exaggerated”. Photo: Shutterstock

“If the major banks keep threatening to hit borrowers with higher interest rates, customer-owned banking institutions are only too happy to welcome new customers.”

Bendigo Bank’s chief executive Mike Hirst described the proposed capital changes as a boon for competition and borrowers.

“I think it’s well considered and reasoned,” he said.

“If the major banks have to hold more capital it will result in them getting lower funding costs in the long term.”

ME Bank chief Jamie McPhee said the capital proposal would put small lenders on a level playing field with the major banks.

“Leveling the playing field – by removing funding and capital anomalies – will further improve competitive tension to the benefit of consumers,” he said.

Treasurer Joe Hockey said the decision on implementation of the proposed change would be left in the hands of the Australian Prudential Regulation Authority.