Another major hot topic for the inquiry is the benefit Australia‘s big four banks get from implicit and explicit government guarantees, and also from a system that allows them to assign a lower risk to residential mortgages than their smaller rivals.
In practice, this allows the major banks to attach a much smaller risk of loss to their residential loan portfolio than smaller banks, allowing them to hold about a third as much capital to cover potential losses on comparable mortgages.
However, the Reserve Bank submission is strongly against such a move, saying the supply of home loans in Australia is “ample” and lowering risk weightings might accelerate household borrowing in the housing market, raising the chances of a financial crash and possible reducing the flow of loans to business.
Another key factor favouring Australia’s major banks is their ability to apply their own risk weightings to residential mortgages, while smaller institutions have a standard risk weighting.
Read more here: ABC