Commonwealth Bank of Australia (ASX: CBA) has followed the lead set by Westpac Banking Corp (ASX: WBC) in raising its variable home loan interest rates.
While Westpac lifted its rates by 0.2%, the Commonwealth Bank will pass on just a 0.15% increase. Its standard variable rate will rise to 5.6% for owner-occupiers, while property investors will now be expected to pay 5.87% per annum on their loans, as highlighted by The Australian Financial Review.
So What: Although the nation's official cash rate remains at a record low of just 2%, the nation's biggest banks are increasing their own rates.
This is to help offset higher costs associated with new regulations that require the banks to remain "unquestionably strong" in case of another severe economic downturn, particularly given the soaring house prices experienced by Sydney and Melbourne in recent years.
To combat this, David Murray recommended in his Financial Services Inquiry (FSI) that the banks hold greater amounts of capital against their loan books. This recommendation will most likely be adopted by the Australian Prudential Regulation Authority (APRA) after the Federal Government accepted the recommendations which will, in turn, create higher costs for the banks themselves.
Of course, the banks were never likely to absorb the additional costs on their own. Lower dividend distributions are still a possibility, but the banks are currently choosing to instead pass the additional costs onto customers – hence the higher variable interest rates.
Although National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) are yet to increase their own in response to Westpac's recent interest rate hike, they mightn't be far around the corner.
Now What: The banks have had a pretty easy ride over the last decade, and enjoyed record earnings results in the process. However, that all appears to be changing now with the Big Four in particular facing tougher scrutiny from the nation's regulators.
Given the headwinds facing the sector, I personally believe there are greater places investors could focus their attention today.
