Australia’s big four banks have come under fire for raising interest rates recently, but for borrowers there may be more bad news on the way.

The global banking prudential regulator, the Basel Committee, has flagged new capital rules will be announced in the next few weeks.

But the committee is in the middle of its own internal arm-wrestle, with the United States wanting to throw out the risk-based models that allows some banks to determine their own capital needs.

• Michelle Payne’s gritty triumph over tragedy
• Body found in charity bin

“In the end we want a pretty simple principle to hold,” Mark Lawrence Group managing director Dr Mark Lawrence said.

“Which is, the more risk banks have, the more capital they should hold.”

But figuring out just how much capital they should hold is now the subject of a fierce international debate.

Already the Australian Prudential Regulation Authority (APRA) has forced the big four to put aside more capital against their housing loans, leaving them less money to lend.

That has seen the big four raise interest rates on standard variable home loans by 0.15-0.20 per cent over the past fortnight, on top of increases to investor loans earlier in the year.

On Tuesday, Bendigo and Adelaide Bank also raised interest rates for owner occupier and investor loans.

However, the changes being discussed by the Basel Committee could potentially force Australian banks to set aside even more capital.

“We will wait and see what they bring down and then we will have to respond in a thoughtful way,” NAB chief executive Andrew Thorburn said when delivering the bank’s profit report in October.

“It is like competition – new competition. Capital requirements, as they change, we have to be agile.”

US does not trust banks’ internal risk models

Inside the Basel Committee the US is leading a drive to do away with the system that allowed so-called “advanced banks”, including Australia’s big four, to determine their own risk weights on their loan books and therefore how much money they should reserve for a crisis.

The US does not trust the banks’ internal risk models and wants a more simple leverage ratio to apply instead.

“The issue is when the crisis hit, some of these models did not work very well,” Dr Lawrence said.

“And the estimates that came out of the models about how much capital the banks should hold turned out to be inadequate.”

Dr Lawrence is a former chief risk officer at ANZ and now consults to some of the world’s biggest banks.

He said while it was not clear which approach the Basel Committee might take, it would involve a substantial change to the way Australian banks measure and calculate risk.

“This will involve a lot of work from the banks and a lot of money to rebuild or build new models and test them and implement them and work with APRA to make sure they meet the new requirements,” he said.

Those local and global regulatory changes mean the cost of banking in Australia is likely to become more expensive and credit less readily available.

But the question of who bears that higher cost – shareholders or customer – is another matter.

“The dilemma we have is that we need to remain attractive to investors and shareholders so we can actually raise the capital in the first place,” Australian Bankers’ Association chief executive Steven Munchenburg told the ABC last month.

Since the global financial crisis, Australia’s major banks have enjoyed an average return on equity (ROE) of about 14 per cent – a similar rate to other large Australian companies and to their global banking peers before the crisis hit.

However, last week outgoing ANZ chief executive Mike Smith conceded that its ROE target of 16 per cent was “a bridge too far”.

“Yes, you can increase capital and you can make the banks safer,” Mr Smith said.

“But somebody has to pay for it and only two people can – the shareholders or the customers – and what we have tried to do is balance that.”

By raising mortgage rates over the course of this year, the big four have shown they still have enough pricing power that customers are likely to feel more of the pain than investors.

“Shareholders until now have seemed very unwilling to accept a lower ROE,” Dr Lawrence said.

“And certainly in Australia it would appear the Aussie bank CEOs are trying to hold the line on the double-digit ROEs for the Aussie banks.”

-ABC