Dividends may be hit as APRA changes capital rules for 'too big to fail' banks Bank assets. Australia's big four banks will be forced to set aside billions more in capital to meet new rules designed to make them more resilient and less of a risk to the financial system. The Commonwealth Bank, Westpac, National Australia Bank and ANZ Bank must lift their buffers for absorbing losses by an extra 1 percentage point from January 2016, the Australian Prudential Regulation Authority said on Monday. The regulator will require the extra loss absorbency because it has determined the ""too big to fail"" major banks are ""domestic systemically important banks"." At the moment, banks are required to set aside about 4.5 per cent of their assets in high-quality "tier 1" capital, plus an extra buffer of about 2.5 per cent, taking the total capital ratio to about 8 per cent. Under the changes, the target capital ratio will be increased to about 9 per cent for the big four. The changes are designed to reduce the probability of a failure of a big bank, because of the larger impact this would have on the financial system and the economy. Macquarie Group and regional banks will escape the rules, which may affect the rapid growth in bank dividends from the big four that has helped underpin their strong share price performance. While each of the big four holds more than $400 billion in assets in Australia, the next largest bank, Macquarie, holds domestic assets worth a fraction of this amount. Not immune from failure While the rules should make banks safer, APRA stressed this did not make them ""immune from failure"." ""Rather, the designation is intended to ensure that banks perceived to be "too big to fail" are subject to more intense supervisory oversight and have greater capacity to absorb losses, to increase their resilience to failure,"" it said in a statement. The rules are also a response to the ""moral hazard"" that arises when investors assume a big bank will be bailed out by the government - an assumption that can cause management to take extra risk without proper consideration of the consequences. ""The direct cost of support associated with moral hazard is borne by taxpayers, representing a large and unacceptable implicit public subsidy of private enterprise,"" APRA said in a paper. The big four already exceed the capital buffers that are in force today and APRA said it expected them to meet the increased requirement because they were generating large amounts of capital. As a result, it was not delaying the starting date for the new rules, as some overseas regulators have done. When credit growth is low, as it is today, banks produce excess capital because there is less need to put it aside against new lending. Dividend impact The market has been awaiting the new rules because they could have implications for the big four's dividend payments. National Australia Bank noted the statement and said it expected to meet the requirement through organic capital generation and, if required, through its dividend reinvestment plan. Recent Nomura research estimated the major banks would have a shortfall ranging from $483 million for Westpac to $2.1 billion for the Commonwealth Bank. Global regulators have also introduced tougher rules for global systemically important banks that would have serious impact on the world financial system if they collapsed - but no Australian banks are on this list. Market reaction Shares in all of the big four closed higher on Monday, with the two largest lenders faring best. ANZ Bank rose 0.5 per cent to $31.95, NAB rose 0.8 per cent to $34.53. Westpac and Commonwealth Bank each rose 1.1 per cent, to $31.92 and $76.76, respectively. APRA had previously said it was developing rules for "too big to fail" banks, but had not specified the size of the buffer or which banks would be covered. Goldman Sachs analyst Andrew Lyons said the major banks were likely to hold more capital than the new minimum from 2016, and this "could create a headwind for dividends." Macquarie and regional banks Suncorp, Bank of Queensland, and Bendigo and Adelaide Bank are seen as the main winners from the changes because they will be exempt. "[Macqaurie] is a clear winner from today's announcement as we had expected it would be named as a D-SIB," Mr Lyons said in a note.