All banks will be allowed to call themselves that no matter their size under eased federal government rules to broaden competition.
The Turnbull government has released draft legislation to allow any banking business with an authorised deposit-taking institution (ADI) licence to call itself a bank.
At present, only ADIs with capital greater than $50 million are permitted to use the term 'bank'.
"This acts to discourage innovative new players from entering the market," Treasurer Scott Morrison and Financial Services Minister Kelly O'Dwyer said in a joint statement on Monday.
They hope the move will encourage more competition on loans and other financial products.
The government is also broadening the powers of the prudential watchdog to strengthen the financial system.
Separate draft legislation will enable the Australian Prudential Regulation Authority to issue rules relating to lending practices of non-bank lenders where it considers they materially contribute to financial stability risks, something that is missing from its present structure.
"The Turnbull government is committed to ensuring that APRA is able to respond flexibly to financial and housing market developments that pose a risk to financial stability," the ministers said.
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