The Financial System Inquiry should not baulk at a proposal to reduce risk weights for insured loans because of concerns it might have an impact on competition, the head of the country's leading mortgage insurer has argued.Genworth chief executive Ellie Comerford said: "There are pros and cons in terms of anything the Inquiry might recommend. There are other things it can do if it wants to level the playing field."In a section on lenders' mortgage insurance in its interim report, the Inquiry said it had received submissions arguing that under current policy settings the major banks would reduce or even stop using LMI altogether. QBE LMI's submission said an emerging trend was the selective charging of a low equity fee in lieu of LMI by some lenders.Currently, lenders using the advanced approach for calculating capital receive no capital benefit for the use of LMI, despite the fact that the LMI providers are required to hold significant capital for the risk that is transferred.Five banks - the majors and Macquarie Bank - have approval to use the advanced modelling approach.This situation, according to a number of first round submissions to the Inquiry, presents the LMI industry with a serious problem.The interim report said it might also present borrowers with a problem: "This may in turn reduce access to mortgage lending for those with low deposits or the self-employed." According to the Reserve Bank, about 25 per cent of home loans are covered by LMI.Under the old Basel I prudential guidelines, lenders were able to apply a lower risk weight to loans with a high loan-to-valuation ratio or to non-standard loans if they were covered by LMI.The Inquiry said several submissions proposed changes to capital standards to reduce the risk weights for insured loans - in effect, a return to the Basel I situation. However, it was concerned that reducing risk weights for insured loans might affect the competitive situation between advanced banks and smaller lenders.Comerford said the important issue was to retain the stability and risk diversification that LMI brought to the financial system. "The RBA says LMI is important for stability," she said."And since 2009, when APRA's current rules took effect, the major banks have continued to use it for risk diversification."