"I would have thought by now you would have a situation where you would be trying to get your growth under 10 per cent every month," Mr Wiblin said. Major bank shares have fallen between 4 and 5 per cent in the past two days, as analysts braced for a more aggressive approach from APRA in adopting proposals tabled by David Murray's Financial System Inquiry for the banks to hold "unquestionably strong" capital ratios that would place them in the top quartile of global banks. The Basel Committee, the global banking regulator, has since raised similar concerns about the internal models known as "risk weights" used by banks to calculate how much capital they hold, and a review to be completed by the end of the year is likely to force material increases in the amount of capital banks must hold to protect against losses. But "prudential concerns" could prompt pre-emptive action. APRA chairman Wayne Byres this week said it would act "sooner rather than later" to implement the financial system inquiry's call for the big four banks and Macquarie to hold higher capital against mortgages. Westpac has been hardest hit in the sell-off during the past two days, falling 5 per cent in this period, and on Thursday was downgraded to "neutral" by Merrill Lynch analyst Andrew Hill, who cited the growing likelihood of action on risk weights from APRA.

A principal at fund manager Alphinity, Andrew Martin, said speculation banks may tap investors for more capital was a key factor in the sharp decline in bank shares in recent days. Capital would also be a key focus when Westpac, NAB and ANZ delivered their half-year results next week, he said. Westpac is the first bank to report. "The key thing people are going to be looking for is capital. Not just the level of capital, but the strategy the management teams are going to have around capital and what their plans are," Mr Martin said. "Banks will need more capital over time. The issue is how much, and that's what people are speculating about." A portfolio manager at Perpetual, Vince Pezzullo, said the primary impact of changes to risk weights flagged by Mr Byres would be to dilute banks' returns from mortgages.

Such a change would also strengthen the ability of regional banks to compete with the major lenders in the $1.3 trillion home loan mortgage market, he said.



"The level of competition would change. Regionals will have an ability to compete on mortgages, the banks' most profitable product, for the first time since pre-GFC," Mr Pezzullo said.



Bank shares had also been hit by a rise in bond yields, making the lenders less attractive to yield-seeking investors, he said. The increase in capital requirements is likely to result in higher mortgage rates, as the banks charge more to recoup the costs of holding more capital, to maintain their high returns.

Deutsche Bank analyst Andrew Triggs said the banks would raise capital by retaining profits and reprice home loans to protect their profits. "With an oligopoly market structure dominated by four large rational players, we think the banks will eventually reprice their mortgage books – we estimate 20 to 30 basis points on average required to hold returns on equity flat," he said in a note to clients. Other factors dragging down bank stocks recently have included the "rotation" into mining stocks, and the declining market odds of an interest rate cut. National Australia Bank expanded its investor lending book the fastest of the big four, at an annualised pace of 13.8 per cent in the month, according to Macquarie analysis. Westpac grew by 10.3 per cent, ANZ by 10.2 per cent and Commonwealth Bank by 9.4 per cent.

Mr Byres said in March that the aim of the 10 per cent threshold was to prevent the growth rate from accelerating, and to stop lending standards deteriorating further. Since then, the annual pace of lending growth to housing investors has increased from 10 per cent in December to 10.4 per cent in March. ANZ senior economist David Cannington said the increase suggested "an increased likelihood that APRA's housing investor portfolio reviews result in further supervisory action". Mr Wiblin said the "wrist-slap" from APRA would occur through the prudential capital ratio, which is set by the regulator and reflects the risks within each bank. Loading