BANKS may impose higher mortgage rates on borrowers to offset added costs of new liquidity rules, which are tipped to drive up the price of the safest financial assets.
To protect banks from future financial shocks, the global banking regulatory body known as the Basel Committee is requiring banks to boost their holdings of top-rated government bonds.
But according to new research from Citi, the healthy state of state and federal budgets means fierce demand for the bonds is likely to outstrip supply, increasing bond prices and therefore bank costs.
After a far stronger recovery here than most developed economies, Citi's conservative estimates found the major local banks alone would soak up nearly all the supply of federal and state government bonds.
By 2013, when Canberra issuance is tipped to start falling, Citi predicts a $27 billion shortage, which would be exacerbated by a likely flood of foreign demand for Australian government paper.
State government debt will also be highly sought-after, it says, as state budgets are on track to hold less debt as a share of output than the Commonwealth.
