The mutual bank initiative, launched in 2011, has been a success and now the government should build on that success by making conditions in the banking industry more competitive, according to the head of one of the financial institutions that made the transition.Defence Bank chief executive, Jon Linehan, said all the evidence suggested that the mutual banking system was working well, with mutual banks reporting growth in customer numbers, share of wallet and market share.Defence Bank's submission to the Financial System Inquiry said the next step in this development was to lower the standardised risk weightings applied to mortgages for regional and mutual banks."We believe such a policy shift is justified on the basis of their loan histories and customers bases and would not pose a threat to the overall stability of the system," Defence bank's submission said.The average risk weight for housing lending under the IRB approach (internal ratings based, which is used by the Big Four banks and Macquarie Bank) is 18 per cent, compared with 39 per cent for banks operating under the standardised approach.Linehan said: "We are not opposed to some differentiation between the risk weights of IRB banks and standardised banks but it should not be as great as it is."We have had no losses in our housing finance portfolio and our 90-day arrears are lower than the industry average. The playing field needs to be evened up."