A leading bank analyst warns the big four may raise mortgage lending rates by as much as 0.65 percentage points to meet new capital rules.
Banking regulator, the Australian Prudential Regulation Authority (APRA), has told Australia’s big banks they need to hold bigger capital reserves as a buffer against losses on their mortgage books.
The big banks said they will have to pass the cost of raising more capital onto customers and shareholders in the form of higher interest rates on loans and lower dividend payouts.
CLSA bank analyst Brian Johnson said the move will strengthen the big four banks – Westpac, National Australia Bank, the Commonwealth Bank and ANZ – in the event of another financial crisis.
He expects the banks to lift interest rates on home loans or not to pass on in full any future cuts in official rates by the Reserve Bank.
“As far as I can calculate, if the banks were to pass all of this onto customers it would only require them to lift housing rates by about 65 basis points (0.65 per cent),” he said.
“That’s before you assume they do anything on basically deposits or small to medium sized enterprise lending.
“So there are a lot of levers they could pull here, including repricing up lending rates.”
Westpac said on Monday it would probably need to raise another $3 billion in capital to meet the new rules and that cost would have to borne by shareholders and customers.
Australian Bankers Association chief executive Steven Munchenberg has defended that strategy.
“Higher bank capital does mean stronger banks, but that capital does come at a cost and that will either need to be borne by shareholders, such as superannuation funds or mum and dad shareholders, or it will be passed onto customers typically through higher interest rates,” he said.
Competition should contain rate rises: CHOICE
Erin Turner, campaigns manager at consumer group CHOICE, said it was not justified for banks to raise interest rates to pay for higher capital reserves.
“The big banks will face costs because of this decision,” she conceded.
“But, if Australia genuinely has a competitive banking environment, which is what the big banks argued over the last year and a half during the Financial System Inquiry, it would be very unusual to see them pass on all the costs.”
Ms Turner said a rise in home loan rates would indicate a lack of competition among the big four banks.
“We hope to the see the banks competing with one another,” she said.
“If they are not, I think that raises bigger, very important questions about the competitive pressures in our banking environment.”
The Customer-Owned Banking Association (COBA) represents community-owned banks and credit unions.
Bank profits under threat
Spokesman Luke Lawler said smaller banks and credit unions would cut their interest rates if the big banks raised rates on their products.
“There is well over 100 players in the banking market whose funding costs are not affected, so there is plenty of competitive pressure there,” he argued.
“If any player, no matter how big, tries to raise prices for consumers there will be a competitive response.”
Academic Sue Wright from Macquarie University, who has studied the cost of higher capital requirements for banks, estimates the banks’ cost of funding would rise by just eight basis points, or 0.08 percentage points, if total capital reserves were raised.
Although Mr Johnson said the big banks would have to raise more capital when international banking rules are strengthened.
Last week, APRA said the big banks would have to raise at least 200 basis points in extra capital to protect against a future financial crisis.
Credit ratings agency Fitch said APRA’s new rules on mortgages are the first step in higher capital requirements for banks.
“Greater levels of capital are likely to be required over the next 18-24 months as further measures from Australia’s 2014 Financial Services Inquiry (FSI) are implemented and adjustments to the global Basel framework are finalised,” Fitch said in a statement.
The big banks have until July next year to meet the new target on home loans.