Efforts to foster the competitiveness of niche lenders and draw new lenders into the home loan market is a policy that may raise prudential concerns, John Laker, chair of the Australian Prudential Regulation Authority told a hearing of the Senate economics committee in Sydney yesterday.Referring to the bubble in home loans in 2002 and 2003, when growth rates hit 20 per cent, Laker said, "we did see quite strong competition in housing lending which took the form of a dilution of credit standards.""That was a form of competition which we were uncomfortable with."This was the period in which non-bank lenders, with easy access to capital markets to fund loans, were flowering (and as they continued to do so until 2006).Laker explained to the hearing that he was not referring to low-doc loans only but "credit underwriting standards - just competitive pressure to meet the customer by finessing, overriding, changing strong credit standards in some cases"."It was an issue we were very vocal about at the time," he said.Reserve Bank of Australia governor Glenn Stevens on Monday put the case for limiting support provided to small lenders.Laker also told the committee that the decision to give banks an additional wholesale funding option through the issue of covered bonds was "entirely a call for policy."He said that "we have had a very simple view for a long period of time."The Banking Act states that depositors must stand first in the queue in the event of a bank or deposit-taking institution" failing. "That clause had always precluded covered bonds. We have had extensive negotiations with the industry."Addressing the impact of the Basel III reforms on capital and liquidity, Laker said that "at first blush, it may well hit harder on the larger financial institutions because there is a tightening of 'production pools', and the tightening of the criteria for hybrid capital instruments which our larger institutions make more use of."Laker told the committee that  "smaller institutions" will not be subject to all the new rules on liquidity that are being worked out for major banks.