Australia's major banks should set aside more capital to ensure they can survive a repeat of the global financial crisis, a government-backed review recommended on Sunday, a measure that may rein in the banks' hefty dividend payouts.
Bank executives have been bracing for the Financial System Inquiry report for months, arguing that higher levels of capital are unnecessary and would come at a cost to the economy.
The 348-page report chaired by David Murray rejected banks' concerns and argued that Australia's financial system has characteristics that give rise to risks, including its dependence on importing capital.
While it did not specify the extent of the increase needed, the review said capital levels at Australian banks needed to rise to 12.2 percent to be in the top quartile of international banks, from current levels of 10-11.6 percent.
"Overall, Murray's recommendations around capital, while not entirely surprising, are a negative for the major banks," said Omkar Joshi, a Sydney-based investment analyst who helps oversee about A$1 billion at Watermark Funds Management Pty.
"I would expect bank shares to underperform the market on Monday."
Australia's "Big Four" lenders - Commonwealth Bank of Australia, Westpac Banking Corp, Australia & New Zealand Banking Group and National Australia Bank - hold a combined market share of more than 80 percent, raising fears they are "too big to fail" .
They survived the global financial crisis that began in 2008 relatively unscathed and have been generating record profits in recent years, largely on the back of massive mortgage books.
Murray said in his report that the major banks would be rendered insolvent in the absence of capital raising if they were hit by a shock similar to what overseas banks suffered during the global financial crisis.
In a note last month, credit rating agency Fitch Ratings estimated the Big Four could face a capital shortfall of up to A$53 billion ($44.1 billion) in the most aggressive scenario.
While the numbers are large, Fitch said the banks were "well positioned" to meet the additional buffers through internal capital generation measures.
Murray, a former head of CBA, also proposed lifting the so-called risk weights on mortgages for major banks, a move that could hit profitability or lead to higher home loan rates.
"These crises impose massive costs on economies and societies, and the circumstances that assisted us during the recent global financial crisis will not be present in future crises," Murray told reporters at a news conference.
The first major review of the financial system since 1997 also recommended raising funding for regulators and reducing disclosure requirements for large listed corporates issuing 'simple bonds' to boost the retail corporate debt market.
It found that the country's A$1.8 trillion compulsory superannuation industry, or pension industry, was inefficient due to a lack of strong competition and was failing to deliver the expected benefits due to its high costs.
Recommendations will be considered by regulators, the central bank and the government, which will consult with industry and consumers until March 31.
