The bank regulator has announced moves to make all banks safer, with the big four bearing the brunt of increased capital requirements to make them "unquestionably strong".

Key points: APRA to raise minimum tier one capital requirement for big four banks to 10.5pc

APRA to raise minimum tier one capital requirement for big four banks to 10.5pc Regulator giving banks until January 1, 2020 to comply

Regulator giving banks until January 1, 2020 to comply Bank share prices rally strongly after weakness earlier in the week

The Australian Prudential Regulation Authority (APRA) has outlined its new "capital adequacy" targets in an information paper, and will require a 150-basis-point (1.5-percentage-point) increase in the minimum safety reserves that must be held by the big four banks and Macquarie.

Smaller banks will see a smaller 50-basis-point increase in the so-called tier one capital that they must hold in reserve to offset potential losses.

Minimal impact

However, the big four banks are generally holding considerably more than the current minimum capital requirement, which APRA said means they will need to increase their tier one ratios by an average of around 100 basis points over December 2016 levels.

In fact, ANZ has told the ASX that it already meets the new big four standard of 10.5 per cent, once a range of previously announced asset sales are finalised.

"Together with the benefits from announced but yet to be completed asset sales, ANZ is well placed to achieve the strengthened capital standards, and to do so well ahead of the schedule outlined by APRA," noted the bank's chief financial officer (CFO) Michelle Jablko.

APRA highlights the effect of its capital requirement increase for the major banks. ( Supplied: APRA )

That has been reflected in the bank's share price in early trade, which had rebounded 2.7 per cent to $29.05 in very early trade following a steep decline yesterday.

Westpac appears to have a little bit more work to do, saying its tier one capital ratio was at 10 per cent by the end of March this year.

The Commonwealth Bank did not discuss its current capital ratio, noting that it will update the market with its full-year results to be released in a matter of weeks.

However, respected UBS bank analyst Jonathan Mott said CBA has the largest shortfall at $4.2 billion, well over twice as much as its nearest rivals NAB and Westpac.

"CBA is well positioned to meet this new capital benchmark," was the essential message from its CFO Robert Jesudason.

Smaller banks have welcomed the larger increase in capital requirements for their big four rivals.

"Suncorp welcomes all measures taken to achieve a more level playing field across Australia's financial services sector," said a Suncorp spokesperson.

"Suncorp already operates above the current minimum capital requirements for a standardised bank, however as APRA notes, there will be further changes to residential risk weightings (Basel 3) that we will also need to understand."

Bank shares rally

However, APRA's target appears to be lower than many investors feared, with Westpac joining the other major banks with share price gains between 2.5 to about 3.5 per cent.

As for customers, it seems likely any impact will be negligible.

"They [APRA] have said that for a hundred-basis-point increase in the capital ratio, they would expect the margins to increase by approximately 10 basis points to pay for the reduction in the ROE, or the return on equity," Velocity Trade banking analyst Brett Le Mesurier told the ABC's The World Today program.

Mr Le Mesurier said that could be reflected in slightly higher mortgage rates or a fall in deposit rates.

Further, more costly, mortgage reforms ahead

The APRA announcement gives banks, and their investors, some certainty about where the goalposts sit for their saftey reserves.

"Todays announcement is the culmination of nearly a decade's financial reform work aimed at building capital strength in the financial system following the global financial crisis," noted APRA chairman Wayne Byres in a statement.

"Capital levels that are unquestionably strong will undoubtedly equip the Australian banking sector to better handle adversity in the future, and reduce the need for public sector support."

Banks will have until January 1, 2020 at the latest to implement the increased requirements.

This will involve them retaining some of their profits or selling new shares to boost their reserves, either of which could see the amount of dividends paid per share fall or grow more slowly.

It may also involve recovering some of the extra cost and maintaining profitability by increasing interest rates on loans.

This trend may be reinforced when APRA releases further guidance later this year that will detail moves to rate residential mortgages as riskier than they are considered currently, thus requiring more reserves to offset potential losses.

Mr Mott has estimated that the big banks will have a near $8 billion capital shortfall, assuming that they strive to get to 10.75 per cent, to be comfortably above APRA's minimum.

That could jump to nearly $18 billion for the big four once a further increase in mortgage risk weights is announced later in the year, which could see home loan rate rises.

However, Mr Byres is not anticipating any major disruption from these changes.

"Australia has a robust and profitable banking industry and APRA believes this latest capital strengthening can be achieved in an orderly way," he added.

Mr Le Mesurier said that has reassured investors they have nothing to worry about.

"APRA in its statement today says that it expects the banks to achieve the capital targets from their normal dividend payout patterns and retained earnings, they don't expect any substantial equity raisings or asset sales from the banks," he said.

Although he added that a likely further increase in so-called mortgage risk weights later in the year may force some banks, notably CBA, to consider implementing more independent interest rate rises.