To do this, it is changing the banks’ “risk weights” - financial models used to determine the riskiness of a loan, which influences how much capital is set against different types of lending.

Under the changes, loans to owner-occupiers who are repaying both interest and principal will attract lower risk weights, while loans to investors and interest-only borrowers will attract higher risk weights.

Banks have already incorporated these changes into their pricing in recent years, but APRA’s new framework is likely to embed these practices permanently.

APRA chairman Wayne Byres said the changes were aimed at ensuring the nation’s banking system remained strong compared with banks overseas. “Capital is the cornerstone of the banking system’s safety and stability. It protects depositors during periods of stress, ensures banks can access funding, facilitates payments and helps banks to keep lending to their customers during good times and bad,” Mr Byres said.

“Although Australia’s banking sector is already strongly capitalised by international standards, the new capital framework will help ensure it stays that way,” he said.

Smaller banks have long complained that Australia’s capital framework gives the big four banks and Macquarie Group an unfair advantage in the home loan market. This is because “advanced” banks with more sophisticated risk systems receive more favourable capital treatment.

APRA said its new framework tried to better support competition, but it had not closed the capital gap entirely between the “advanced” banks and others because it supported giving lenders an incentive to invest in advanced modelling.

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