The financial regulator plans to help Australian banks cut their reliance on the "kindness of strangers" for their funding through an overhaul of the nation's securitisation markets.
In a move that could also support competition in home lending, the Australian Prudential Regulation Authority on Monday flagged changes to bolster the market for lower-risk securitised assets.
Securitisation refers to the practice of selling bundles of assets, such as mortgages, to investors. In the United States it played a role spreading subprime debt before the 2008 global financial crisis.
But Australia's sector has posted relatively low default rates, and regulators see it as a valuable alternative to volatile short-term money markets.
APRA's executive general manager, Charles Littrell, said the regulator was developing a new framework that would reduce constraints to investing in securitised assets that were "obviously safe". At the same time it will introduce "substantial disincentives" to investing in riskier assets.
"Our aspiration for securitisation under the reformed prudential arrangements is that Australia will end up with a large and active funding-only market," he said.
"This will materially assist Australia's banking sector to correct its current imbalance between long-term, retail domestic assets, and a funding side overly reliant upon the kindness of strangers."
Securitisation markets have bounced back sharply this year, with funding costs on some deals at the lowest levels since 2007.
Only 8 per cent of the mortgage market is funded through securitisation today - compared with more than 20 per cent before the global financial crisis - but Mr Littrell said it remained important for competition.
"As has been the case for many years, we would like to see a large and liquid securitisation market supporting competition Australian home lending," he said.