In a move to strengthen Australia's financial industry and bring it into the world's top quarter, Australia's major banks will be required to hold billions of AU dollars in extra capital to cover housing mortgages, Australia's financial regulator said on Monday.

The Australian Prudential Regulation Authority (APRA) said it will increase the average risk weighting for home loans in Australia from around 16 percent to at least 25 percent from July 1, 2016, requiring Australia's banks to lift their capital on average by 80 basis points.

Mortgage risk weights reflect the belief that residential mortgages are safer than other types of loan, therefore the banks need only to hold enough capital to cover losses on a certain percentage of their total residential mortgage loan book, rather than 100 percent of the loans, the Australian Broadcasting Corporation (ABC) reported on Monday.

The move would go some way towards Australia's banks meeting a key recommendation of the Australian government's Financial System Inquiry, aiming to rank among the top quartile of global banks in terms of reserved capital.

The move applies to Australia's big four banks - ANZ, the Commonwealth, National Australia Bank and Westpac - as well as Macquarie Group. Until the APRA move, they've been able to set their own risk weighting for mortgages.

Australia's smaller lenders - which have a risk weighting of 35 percent - have persistently argued the current risk rating status quo gives the major's a competitive advantage.

"The mortgage industry was a little bit biased towards the major players because they could hold less capital and, therefore, it brings the center of gravity back a little further towards some of the smaller players," the principal of Digital Finance Analytics, Martin North said.

ANZ told local media it would likely need to add an additional 2.3 billion Australian dollars (1.7 billion U.S. dollars) to its mortgage-lending book to meet the APRA requirement, saying its current risk weight for mortgages is around 15 percent.

Westpac has been the only major to be concrete the capital raising's likely impact, however the bank's Chief Financial Officer, Peter King, told the ABC shareholders and customers would bear some of the lender's 3 billion Australian dollar (2.2 billion U.S. dollar) cost.

"We are well placed for this change having already taken a number of significant steps to boost our capital position, including partially underwriting the first half 2015 DRP (dividend reinvestment plan) and the recent sale of shares in BT Investment Management," King said. "While Westpac is well-placed to meet these changes, increased capital does come at a cost. The cost of holding higher capital will inevitably be borne by customers and shareholders."