Westpac's move to raise variable mortgage rates in the face of higher regulatory capital requirements will pay a return that is less than the cost of capital, according to the bank's chief executive.On October 14 Westpac announced that it would increase its variable mortgage rates for owner-occupiers and investors by 20 basis points in response to an Australian Prudential Regulation Authority requirement that the big banks (plus Macquarie Bank) increase their mortgage risk weights for the purpose of allocation regulatory capital.At the same time the bank announced a A$3.5 billion capital raising. The total amount of capital it has raised this year in response to regulatory changes is around $6 billion.At an investor briefing yesterday to announce the bank's results for the year to September, Westpac chief executive Brian Hartzer said: "We have tried to be disciplined about managing the impact."The amount of capital on mortgages went up 50 per cent and we had to raise $6 billion of capital."The return on the increased on mortgages that we put through is less than our cost of capital."Several analysts asked Hartzer what impact the decision was likely to have on the bank's competitive position in the mortgage market.Westpac has lost share in the mortgage market in recent years and there is some prospect that it will lose even more share as a result of its pricing decision.According to Australian Prudential Regulation Authority figures, Westpac's $345.4 billion mortgage portfolio grew by 6.4 per cent over the 12 months to September, compared with system growth of 6.8 per cent over the same period. Over the past five years the portfolio has grown by 24.4 per cent, compared with system growth of 32.5 per cent.Hartzer said the impact of regulatory changes on lending rates was an industry issue. It was not only the big banks that were putting up rates.Last week ME said it would increase its variable rates by 20 bps, justifying the decision by saying it had been achieving below-market shareholder returns on mortgages.Comparison site Mozo said other small mortgage lenders to raise variable rates over the past couple of weeks included AMP Bank, Citibank and Firstmac.Hartzer defended the decision, saying the cost was shared by borrowers and shareholders. The impact for shareholders has been felt in flat dividend payments, a fall in the bank's return on equity (down from 16.4 per cent to 15.8 per cent over the past year) and a weaker share price.