Australian banks will be given additional incentives to compete for conventional owner-occupier home loans as opposed to investment and "non-standard" mortgages under a new capital risk regime proposed by the country's prudential regulator.The Australian Prudential Regulation Authority on Wednesday published several discussion papers that include details of how it proposes to bring local capital adequacy rules in line with the Basel 3 framework.Under the changes, banks will be expected to recalibrate the risk profile of their mortgage books according to new criteria.An important feature of the proposed new framework is the requirement for banks to classify conventional mortgages as "standard" and "non-standard".In general terms, non-standard loans - which in most cases will attract higher risk weights - include mortgages that were approved outside of the lender's loan serviceability policies.The new framework significantly raises the risk weights of non-standard mortgages depending on loan to value ratios.For example, a non-standard loan with an LVR lower than 50 per cent that currently attracts a risk weight of 35 per cent will have to be re-weighted to 100 per cent under the proposed reforms. While the proposals are sufficiently material to induce changes in the composition of lending books across the banking sector, the regulator has indicated that the overall minimum Tier 1 capital requirements would not be raised above the "unquestionably strong" target levels flagged to supervised banks in July last year.APRA indicated at the time that it expected to raise the common equity Tier 1 capital requirement of the internally rated major banks by around 150 basis points to at least 10.5 per cent from January 2020."APRA has undertaken to ensure that, if ADIs meet the benchmarks set out in July 2017 for unquestionably strong capital ratios, any changes to the capital framework that eventuate from the finalisation of the proposals in this paper will be able to be accommodated by existing capital holdings and not necessitate additional capital raisings," the regulator stated in one of its discussion papers.This guidance from the regulator also applies to standardised banks that were told in July their CET 1 requirement would rise on average by 50 basis points.The proposed overhaul of mortgage risk weightings is likely to disadvantage banks that have greater exposure to high loan-to-value borrowers, property investors and non-standard loan products.CLSA bank analyst Brian Johnson said banks with a disproportionate exposure to the Sydney property market were likely to have loan books with a higher LVR profile."If you're a bank with a relatively high market share in Sydney then these reforms might put you at some disadvantage," he said.Research published last year by national mortgage broking platform, AFG, indicates that Westpac has been among the most aggressive marketers of interest-only loans among APRA-regulated lenders.Under APRA's revised capital rules, most interest-only and investment related housing loans will attract higher risk weightings.For example, the risk weighting on standard investment mortgages with LVRs of between 80 per cent and 90 per cent will rise to 60 per cent from 35 per cent.For non-standard investment loans in