Australia's biggest banks will need to hold billions of dollars in extra capital against their home loans, following a move by the banking regulator to strengthen the country's financial system.
The Australian Prudential Regulation Authority (APRA) says it will increase the average risk weighting for home loans from around 16 per cent to at least 25 per cent from July 1, 2016.
In a statement, APRA said the move would require the banks to lift their capital reserves by around 80 basis points on average.
That would go some way toward the extra 200 basis points of capital APRA wants to banks to hold in order for their reserves to rank among the top quartile of global banks, which was a recommendation of the government's Financial System Inquiry.
The move will apply to the big four banks - ANZ, the Commonwealth, National Australia Bank and Westpac - as well as Macquarie Group. Until now, they've been able to set their own risk weighting for mortgages.
Smaller banks already have a risk weighting of 35 per cent and have argued the status quo amounted to a competitive advantage for the major lenders.
ANZ said its current risk weight for mortgage lending was around 15 per cent and it would need to add another $2.3 billion to its mortgage lending book to meet the APRA requirement.
Westpac said that if the APRA move was imposed today, its common equity tier one ratio would fall to around 8.5 per cent and it would need to allocate another $3 billion to lift it towards the top end of its preferred 8.75 to 9.25 per cent range.
National Australia Bank said it was well placed to process the lift in risk weights after raising $5.5 billion from investors in May.
The Commonwealth Bank said it had been working on options to lift its capital levels, while Macquarie Group said it would fund any extra requirements through retained earnings and its existing capital surplus.
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