In a statement, the Australian Prudential Regulation Authority (APRA) said it expects the big four banks to increase their total capital by 3 percentage points of risk-weighted assets over the next four years.
What this means is the banks are required to have additional reserves to absorb any volatility.
It is expected much of this capital will be raised by supplementary tier 2 capital, which includes undisclosed reserves, subordinated term debts and hybrid financial products.
For small to medium-sized authorised deposit taking institutions (ADIs), extra loss-absorbing capacity would be considered on a case-by-case basis on how the new regulations would apply to them.
APRA deputy chair John Lonsdale stated this was an important step in minimising the risks of bank failures in Australia as the country tries to move away from relying on taxpayers to guarantee the institutions.
“The global financial crisis highlighted examples overseas where taxpayers had to bail out large banks due to a lack of residual financial capacity. Boosting loss-absorbing capacity enhances the safety of the financial system by increasing the financial resources that an ADI holds for the purpose of orderly resolution and the stabilisation of critical functions in the unlikely event that it fails,” said Mr Lonsdale.
APRA estimates the increase in total capital requirements will have a less than five basis points cost on the overall funding for the big four banks.