The big banks should be forced to carry more capital because their sheer size and implicit taxpayer support makes them critically important to the economy, the International Monetary Fund says.
The fund has also ranked the nation’s banking sector as one of the most concentrated in the world, saying this dominance is one reason the banks are much more profitable than their global peers.
The four major banks enjoy a funding cost advantage derived from an implicit government guarantee.
In a review of the financial system published on Friday, the fund judged the sector to be ‘‘sound, resilient, and well managed’'.
However, it also said there was room for improvement in how the nation shielded itself against future global financial shocks, which are most likely to affect the economy via the banking system.
In particular, it said the Commonwealth Bank, Westpac, ANZ and NAB were ‘‘systemically important’’ – meaning their health or otherwise has a major impact on the economy.
‘‘Significant and protracted difficulties in any one of them would have severe repercussions for the entire financial system and, in turn, the real economy,’’ the fund said.
To shelter the economy from any troubles in the banking sector, the IMF said requiring the banks to hold more capital so they could absorb losses ‘‘would seem a natural next step to take’’.
Forcing banks to hold more capital – an issue being considered by the Australian Prudential Regulation Authority – would act as a drain on profits.
The fund also said the ‘‘highly profitable’’ big four benefited from wider margins than their local and international rivals because credit markets assumed they would be supported by the government if needed.
‘‘The four major banks enjoy a funding cost advantage derived from an implicit government guarantee, and should bear some of the cost of mitigating systemic risk,’’ the fund said.
The fund said the big four held 80 per cent of bank assets and 88 per cent of residential mortgages - making the sector ‘‘one of the most concentrated in the world’’. This gave the banks pricing power in the market - which boost profits.
However, weaker demand for credit and higher funding costs suggested big bank profitability was likely to wane in years to come, underlining the need to shield the sector against potential shocks.
The fund also suggested that the Australian Prudential Regulation Authority dedicate more resources to stress testing, and the Reserve Bank establish its own stress-testing framework ‘‘to identify and monitor emerging systemic risks.’’