* NZ proposals would mean big capital hikes for 'Big Four' banks
* APRA keen to reduce risk of capital shift to New Zealand
* ANZ says APRA proposal may reduce CET1 ratio by 75 bps
* APRA proposals to come into effect from Jan 2021 (Adds ANZ estimate impact to CET1 ratio)
By Paulina Duran
SYDNEY, Oct 15 (Reuters) - Australia's banking regulator on Tuesday said it plans to ask lenders to meet higher capital levels domestically to offset their exposure to large overseas units - a move that comes in response to plans by New Zealand to hike capital ratios for the sector.
Australia's Big Four banks own the largest lenders in New Zealand, where proposed new capital ratios would require the banks to raise NZ$20 billion ($12.6 billion) over the next five years.
The Australian Prudential (LON:PRU) Regulation Authority (APRA) said in a consultation paper it wanted to limit the amount of cash banks can have exposed to a single business unit to 10%. Under current rules, banks may not have enough money to protect Australian customers if they held more cash in overseas business units, it added.
Some lenders may need to raise capital but there were also other options, it said.
"In relation to New Zealand, there are a number of options available to the banks. If they decide to fund any higher capital requirements by retaining local profits, they are unlikely to require additional capital domestically, APRA said in a statement.
Australia and New Zealand Banking Group ANZ.AX , which owns New Zealand's largest lender and therefore would be hardest hit by the proposed changes, said that applying APRA's proposed approach could reduce its level 1 CET1 capital ratio by about 75 basis points, or A$2.5 billion.
"However, ANZ believes that this outcome is unlikely and, post implementation of management actions, the net capital impact could be minimal," it said in a statement to the exchange. The statement did not elaborate on what actions would be taken.
Westpac Banking Corp WBC.AX said that the impact for them could be a reduction of about 40 basis point on its level 1 CET1 capital ratio while the Commonwealth Bank of Australia CBA.AX said it estimated a reduction in the same ratio of about 30 basis points.
National Australia Bank NAB.AX said it expected a minimal impact on its capital levels.
"This is a complicated proposal and is likely to take time for the market to fully digest," Credit Suisse (SIX:CSGN) banking analysts told clients in a note. "It is a net-negative for the sector ...(but) we acknowledge there are some offsetting measures that may mean the impact is less than the 100bp headline."
The proposals are open to submissions from the lenders and interested parties until Jan. 31. The regulator intends to finalise the changes in early 2020 with the new requirements expected to come into force from Jan. 1, 2021.
APRA is also proposing a reduction in the capital that banks must hold to offset exposure to smaller banking or insurance units. ($1 = 1.5868 New Zealand dollars)