APRA has announced an increase in the amount of capital required to be held by lenders against residential mortgages, which one lender hopes will level the playing field in the mortgage market.

This change will mean that for banks and other institutions who use the internal ratings-based (IRB) approach, such as Australia's major banks, the average risk weight on Australian residential mortgage exposures will increase from approximately 16% to at least 25%. 

The increase is in response to the Financial System Inquiry (FSI), which reccomended narrowing the difference between the risk weights used by Australia's major lenders and those used by the nation's smaller lenders. 

In a submissions to the inquiry, Suncorp Bank argued in the rules around risk weights and capital adequacy created an “entrenched disadvantage” for non-major lenders. 

“As a regional bank, Suncorp Bank is required to hold up to three times the level of capital of the major banks against equivalent portfolios with the same underlying risk. This makes clear the competitive differential driven by the regulatory settings. It also highlights the barriers to entry in banking created by the onerous capital and regulatory environment for non-major banks,” the non-major said.

The increased IRB risk weights will apply to all Australian residential mortgages, other than lending to small businesses secured by residential mortgage and will come into effect on 1 July, 2016. 

While smaller lenders, such as Suncorp, are welcoming the changes the head of one of Australia's major banks warned lenders may have to pass the burden on to their customers.

"While Westpac is well-placed to meet these changes, increased capital does come at a cost," chief financial officer Peter King said in a statement to the Australian Securities Exchange.

"The cost of holding higher capital will inevitably be borne by customers and shareholders," he said.

In their own statement after the APRA announcement, ANZ said the changes would require them to allocate an addtional $2.3 billion towards their mortagage books.