The government will remove a key source of support for small lenders, ceasing new investments in residential mortgage-backed securities in response to better funding market conditions.
Treasurer Wayne Swan is set to reveal the change in a speech on Wednesday, when he will question the Coalition's commitment to the "four pillars" policy that opposes mergers among the big banks.
Since the depths of the global financial crisis, the government has spent $15.5 billion investing in residential mortgage-backed securities - a key funding market for small banks and credit unions, which froze in 2008.
But after recent RMBS issues were concluded without government support, Mr Swan will say the pricing in the market is "significantly better than for most of the last five years" and there is no need for new taxpayer support.
"Given the big improvement we've seen in the RMBS market, and the ongoing lack of demand for AOFM [Australian Office of Financial Management] support, the Treasury has advised me that it's now time to stop making new investments," Mr Swan's speech notes say.
"While I've accepted this recommendation, that obviously doesn't mean we'll be selling down our existing stock of RMBS any time soon."
The Treasurer will also use the speech, in Sydney, to question whether shadow Treasurer Joe Hockey would consider abandoning the "four pillars" policy - long loathed by bank chiefs.
At the height of the crisis in 2008, Mr Swan says he came under "growing pressure" to abolish the policy - which has been in place since 1990.
The Coalition is planning a sweeping review of the financial system if it wins this year's election, a move backed by several big banks. Mr Swan will question whether the motive for such a review may be to attack the four pillars.
"You have to wonder at the motives of those calling for yet another financial system inquiry," Mr Swan will say. "Do they think the GFC was not a sufficient stress test? Impossible. Or do they carry the baton of those who, in 2008, urged me to weaken stability and competition by abolishing the four pillars policy? I wonder."
Bank chiefs claim the four pillars policy prevents them growing to a size that would allow them to compete on the global stage but Mr Swan says it is vital for competition.
"The four pillars policy has endured, in one form or another, through seven successive treasurerships over more than two decades and has served Australia well in all that time," his speech says. "Not only is it hugely important for banking competition, but it wouldn't be prudent to have the soundness of our banking system resting on the strength and risk management skills of three banks rather than four."
Mr Hockey said in 2010 there was "bipartisan" support for the four pillars policy.
Other calls for an inquiry into the financial system have come from credit unions and Mr Swan's own department.
In its "red book" briefing to Mr Swan soon after Labor was returned to power in 2010, Treasury said there was a "clear need for a comprehensive review of the financial sector regulatory framework" this term.