But the Australian Prudential Regulation Authority (APRA) stopped short of giving an official directive, even as central banks across the world have restricted plans to return capital to investors as the outbreak threatens earnings and disrupts operations.
APRA asked banks and insurers to limit discretionary capital distributions so that they have sufficient capacity to continue essential functions like lending and underwriting insurance.
"Banks and insurers have a critical role to play in supporting Australian households, businesses and the broader economy during this period of significant disruption caused by COVID-19," the regulator advised in a letter to the sector.
Spokesmen for Commonwealth Bank and Australia and New Zealand Banking Group, the No. 1 and fourth largest lenders respectively, declined to comment.
Media representatives for Australia's other two major banks, Westpac Banking Corp and National Australia Bank, did not return requests for comment.
The regulator said dividends will need to be at a "materially reduced level" even when a board is confident that it can approve a dividend before conducting stress tests that will need to be discussed with APRA.
APRA added it expects boards to appropriately limit cash bonuses for executives and initiate other capital management plans on a pre-emptive basis, to maintain customer confidence and continue lending.
Analysts had already forecast that Australia's Big Four banks may cut dividends in coming weeks due to the pandemic.
Meanwhile, Fitch Ratings downgraded the debt ratings of the four major banks and their debt instruments by one notch to 'A+', from 'AA-' on Tuesday, the first of the three major credit agencies to do so. S&P Global and Moody's Investor Service rate the "Big Four" Australian lenders 'AA-' and 'Aa3' respectively.
"The move by Fitch may slightly increase the marginal cost of senior unsecured bond issues for the major banks," said Azib Khan, banking analyst at stockbroker Morgans Financial.
"However, this isn't much of an issue for the major banks at the moment because they have access to cheap funding through the RBA's Term Funding Facility," Khan added, referring to the central bank's three-year lending facility that charges them only 0.25%.
(Reporting by Paulina Duran in Sydney and Rashmi Ashok in Bengaluru; Editing by Edmund Blair/Giles Elgood/Susan Fenton)