Banking analysts say big banks could respond to the South Australian bank tax by hitting local borrowers in the pocket with mortgage rate rises.
Mortgage rates could rise in South Australia after the state government unveiled its own version of the federal government banks levy, confirming investor fears that a "Pandora's box" of potential new taxes on banks has been thrown wide open.
Analysts say big banks could respond aggressively after SA treasurer Tom Koutsantonis unveiled an unprecedented state-based bank levy, with rate rises for South Australian mortgages and a brake on business lending among their options.
UBS analyst Jon Mott warned last month that the federal government's bank levy had opened a Pandora's box and, with banks shares slumping on Friday, investors now seem to agree.
"Pandora's Box is officially open," Mr Mott wrote on Friday.
The latest levy - another 0.06 percentage point impost - would have little impact on the banks' profits, analysts said.
But with WA Treasurer Ben Wyatt also calling a local levy an attractive option, the banks may feel compelled to act - even if it incurs the wrath of customers and politicians.
"We expect the banks to push back against the South Australian bank levy as they will not want the other states to follow SA's lead," Mr Mott wrote in a note to investors.
That could mean raising South Australian mortgage and corporate loan rates, reining in business lending, or threatening to move call centres and processing centres, Mr Mott said.
Those moves would have a direct negative impact on a state economy that already has the highest unemployment rate in the country, and act as a stiff warning to others.
The Australian Bankers' Association has already called on other state and territory leaders to rule out introducing their own bank levy.
Deutsche Bank analyst Andrew Triggs said SA mortgage rate rises would be easy to implement.
Mr Koutsantonis wants to raise $370 million over the next four years from a levy on the big four banks and Macquarie Group, who have already been angered by Federal Treasurer Scott Morrison's impost.
"It further dents already fragile sentiment and raises the threat of increased political risk," Mr Triggs wrote.
Bank shares dropped on Friday, with investors spooked by fears of what the announcement in Thursday's SA state budget could lead to.
"With the federal election 12 to 18 months away, further increases in the federal bank levy cannot be ruled out, especially if the Australian budget remains under pressure," Mr Mott said.