Australian banks should be forced to hold more capital to minimise their risk of failure and improve competition, the Financial System Inquiry has found.

The final report of David Murray’s blueprint for the future of Australia’s financial system, released by Treasurer Joe Hockey on Sunday, says capital requirements should be raised to make Australian banks less likely to fail, but also to minimise the costs to the taxpayer if they do.

It would also level the playing field for smaller banks and lenders, reducing the perception that the government would step in to rescue the big banks if they were in trouble.

The big banks have already complained that holding extra capital would be damaging, and ANZ says it will result in higher interest rates for customers.