Australian banks may be forced into a global race to raise capital reserves if the Financial System Inquiry's recommendations are implemented.
Former Commonwealth Bank boss David Murray has recommended that banks increase their capital holdings from 18 per cent to between 25 and 30 per cent.
The Australian Prudential Regulation Authority would make a decision on capital raising, which some analysts estimate could cost the big banks about $25 billion between them.
Mr Murray has said Australian banks need to be among the top quartile of global banks, rather than around the middle as they are now.
Swiss banking group UBS says the increased capital requirements could force Australian banks to keep raising their capital levels so they kept up with their global counterparts.
"By targeting a dynamic benchmark there is a risk the Australian banking system enters a global 'race to the top' of capital levels," it said in a research note.
"The outcome of this may be higher capital requirements than the market expected, to achieve an `unquestionably strong' system."
Despite the prospect of having to increase their capital reserves, the Commonwealth Bank, Westpac, NAB and ANZ shares all rallied by more than one per cent on Monday while the smaller, regional banks were mixed.
Morningstar banking analyst David Ellis said this was because the higher capital requirements would cost the big banks a lot less than financial analysts had anticipated, estimating they could easily, between them, raise capital reserves by $25 billion over a three-year period.
"The banks are extremely well placed to generate sufficient capital organically ... to satisfy higher capital requirements," he told AAP.
"That's why the share prices have reacted positively."
Lonsec senior client adviser Michael Heffernan said share market investors had failed to appreciate how stricter capital requirements for the banks would in fact help the smaller, regional lenders.
"The regional banks will be relatively advantaged," he said.
"The market is not reacting that way at the moment but then the market can be perverse at times."
Meanwhile, global financial services group Credit Suisse said the bigger banks may be reluctant to raise the capital to meet the potential new requirements.
"We see major banks as immediate losers from the final report," it said in a research note.
Ratings agency Fitch said the Murray report's recommendations should improve the resilience of the banking sector to shocks, and help smaller lenders become more competitive.
The agency expects the big four banks will be given enough time to beef up the capital buffers, but noting that they might carry out equity market placements to meet the targets sooner.
The big four have previously complained that holding extra capital would be damaging, with ANZ warning such a move would result in higher interest rates for customers.
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