MELBOURNE, Australia—Australia’s biggest banks will need to set aside billions of dollars more against potential home-loan losses as the industry regulator continues to tighten settings to ensure lenders can better resist future crises.

The latest change, introduced Monday by the Australian Prudential Regulation Authority, will require large banks that dominate the local mortgage market to increase average home-loan risk weights -- a capital requirement held by banks as a buffer against the riskiness of their assets -- to...