* Four major banks to have Tier 1 ratio of 10.5 pct by 2020
* Sector faces capital shortfall of A$8 bln - analysts
* No new rules on mortgage risks imminent
* Other banks to raise capital by 50 basis points (Recasts and writes through with capital shortfall estimates)
SYDNEY, July 19 (Reuters) - Australia set new rules for higher capital on the country's largest banks - targets that imply a combined capital shortfall of as much as A$8 billion ($6.3 billion) - but held off on immediate measures to shore up their burgeoning mortgage books.
The new capital requirement, the second in just two years, came in a tad above expectations. But shares in the Big Four banks jumped between 3-4 percent on the absence of imminent rules for higher risk weights for mortgages and statements from each of the lenders that they were well positioned to cope.
Australia's major banks are already among the most well-capitalised lenders in the world, although the new rules could dent what have been robust returns for shareholders from the sector.
Keen to make the sector impregnable to financial shocks, the Australian Prudential Regulation Authority (APRA) raised the target for major banks' Tier 1 ratio by 150 basis points to at least 10.5 percent, compared to expectations of 10 percent. The banks are expected to meet the new benchmark by January 2020.
The Big Four - Commonwealth Bank, Westpac Banking Corp, ANZ Banking Group and National Australia Bank Ltd - hold combined market share of more than 80 percent and authorities are concerned that any failure could fatally weaken the broader economy.
"Capital levels that are unquestionably strong will undoubtedly equip the Australian banking sector to better handle adversity in the future and reduce the need for public sector support," APRA Chairman Wayne Byres said in a statement.
The banking watchdog said it would look at mortgage risk weights when it releases a discussion paper later this year but It did not offer any details on what measures may be announced.
A potential increase in risk weights on mortgages to 30 percent from 25 percent now could expand the Big Four's potential capital deficit to A$17.7 billion, according to a UBS estimate. But the move is now expected to take some years before coming to pass and should also be digested comfortably, analysts said.
Analysts estimated the Big Four banks could need a combined A$5.7 billion to A$8 billion to meet the new requirement although each lender will differ somewhat in how much they need to raise.
"We estimate a capital shortfall of A$1-A$2 billion for CBA which they can generate internally. It's not a large figure for a bank the size of CBA," said Danial Moradi, Melbourne-based senior equity strategist at Lonsec.
"ANZ will be in a surplus position given its recent divestments."
Together the Big Four raised A$20 billion in 2015, triggering a slowdown in dividend payouts as net interest margins slipped to record lows of about 2 percent.
FROTHY PROPERTY MARKET
The APRA level of 10.5 percent for major banks is not directly comparable on an international basis.
CBA has, for example, a Common Equity Tier 1 ratio of 15.2 percent on an internationally comparable basis at end-March, above 14.5 percent for Lloyds Banking Group and making it one of the most well capitalised banks in the world.
Non-major banks would be required to increase capital by about 50 basis points, APRA said.
Analysts said the main risk now was potential changes to mortgage risk weights amid persistent concerns about a frothy property market.
The discussion paper due by year-end would reveal measures to address the banks' "structural concentration of exposures to residential mortgages", the regulator said, adding that it will draft prudential standards in 2018 for a final release in 2019.
"The real question is how much will risk weights go up to. If it rises to 30 percent it is probably okay, but any more than that would be significant," said Omkar Joshi, portfolio manager at Regal Funds Management.
Australian banks survived the global financial crisis that began in 2008 relatively unscathed - backed by an explicit government guarantee - and have been highly profitable largely due to their mortgage businesses.
This year APRA asked banks to limit new interest-only loans to 30 percent of total new mortgages, from 40 percent now. It also demanded that banks cap annual growth in investor credit to "comfortably remain below" a previously set limit of 10 percent. ($1 = 1.2614 Australian dollars) (Reporting by Swati Pandey and Jamie Freed; Editing by Stephen Coates and Edwina Gibbs)