Banks in Australia may impose higher mortgage rates on borrowers to offset the costs of new liquidity rules that will drive up prices of the country’s safest financial assets.
The global banking regulator, Basel Committee, is requiring banks to boost their holdings of the top-rated government bonds to ensure their safety from a future financial crisis.
However, new research conducted by Citi group shows that the condition of the state and federal budgets suggest that strong demand for the bonds will likely outstrip supply.
Following a stronger recovery in Australia than in many other developed economies, Citi’s estimates showed that big local banks would take in nearly all the supply of federal and state government bonds.
In 2013, when Canberra issuance is tipped to decline, Citi predicts a $27 billion bond shortage, which could be worsened by a high demand for Australian government paper.
Joshua Williamson, an economist from Citi, said that if left ignored, the balance of supply and demand would fuel bank costs due to bond price increases.
“There is not enough high-grade federal and state government bonds to satisfy regulatory demand, let alone the combination of regulatory and normal market demand,” he said.
“To the man in the street, it means that the banks may have to put up interest rates on their loans.”