Aid for smaller banks to catch up to big banks in the use of 'internal ratings-based' (IRB) risk weights may address the cost advantage big banks hold, the interim report of the Financial System Inquiry suggests.An alternative might be to tinker with risks weights, perhaps through a tiered system, it said.The Big Four banks and Macquarie Bank have been accredited by APRA to use IRB risk weights; other ADIs use standardised weights."The banking sector is competitive, albeit concentrated. The application of capital requirements is not competitively neutral," the report said.Large banks "derive funding advantages from their size and sophisticated risk management systems," the inquiry said. It "However, some submissions argue that large banks also benefit from a funding advantage because they are perceived as being too-big-to-fail. "The Inquiry considers the best way to deal with any potential competitive advantage arising from these perceptions is to directly address the systemic risks posed by large banks."But the interim report also noted that IRB risk weights provide incentives to reduce risk, while standardised weights do not. And it said the disadvantage provided by standardised risk weights would vary over time depending on the riskiness of the institutions' assets. A 2013 report by Goldman Sachs found that increased risk weightings for the big Australian banks would weigh most heavily on Westpac (see Banking Day's 2013 story).In interventionist mode, the inquiry also backed "direct Government support to the RMBS market," while also pushing APRA and the RBA "to allow RMBS to be treated as a high-quality liquid asset for the purpose of the liquidity coverage ratio."