Nick Xenophon will introduce legislation next year to require the prudential regulator to closely consider the impact of its actions on competition, and the different housing markets across Australia when applying lending limits, in order to help regional and community banks compete on a more level playing field with the majors.

Senator Xenophon told the Community Bank National Conference in Adelaide on Tuesday "a more nuanced, calibrated approach" by the Australian Prudential Regulation Authority was required. This could be achieved if APRA "is required by law, in its objectives, not only to take into account its financial stability mandate, as it must, but secondary factors such as competition in the banking sector", he said.

He also described APRA's so-called macroprudential policies that limit investor lending growth and interest-only loans as "too blunt an instrument" which "seem to have the effect of consolidating the market power of the big four while nobbling everyone else".

Senator Nick Xenophon wants APRA to consider the impact of its housing limits on banks in regional areas. AAP

The comments came as the Customer Owned Banking Association (COBA), which represents credit unions, building societies and mutual banks, called for APRA's statutory mandate to be amended to include an explicit "secondary competition objective".

This would require it to weigh competition issues once it had considered its primary objective of ensuring financial stability and safety. Currently, APRA's mandate requires it to balance efficiency, competition, contestability and competitive neutrality. But COBA argues that competition should stand above the others.