WELLINGTON, Oct 7 (Reuters) - New Zealand's central bank said on Tuesday it would form a new financial policy committee that would give it the power to set prudential requirements for banks and help it to make decisions over mortgage lending ratios.

The move is in line with recommendations that followed a recent parliamentary inquiry into banking competition and will strengthen the Reserve Bank of New Zealand's financial policy-making, the RBNZ said in a statement.

New Zealand's centre-right government is pushing for more competition in the country's banking sector, which is dominated by four large Australian-owned banks: Westpac Banking Corp WBC.AX, ASB Bank, which is part of Commonwealth Bank of Australia CBA.AX, Bank of New Zealand, which belongs to National Australia Bank NAB.AX, and Australia and New Zealand Banking Group ANZ.AX.

The committee will consist of the RBNZ chair, its governor, three other board members, and up to two members who are not board members or employees of the central bank, the RBNZ said.

"The creation of the FPC will strengthen financial policy-making at the RBNZ, with greater focus and expertise brought to bear to make sure that the New Zealand financial system remains strong and stable," Deputy Chair Rodger Finlay said.

The committee is planned to be operational from early 2026.

The RBNZ in August proposed an easing of lenders' capital requirements, after criticism that the regulations reduced availability of funds in the economy and led to extra costs for borrowers.

New Zealand currently limits how much housing finance lenders can provide for borrowers who want to take on a high amount of debt relative to their incomes. It also has rules on down payment requirements for buying residential properties.

Both measures aim to provide stability to the housing market where prices have swung sharply in recent years, rising 40% during the pandemic before slumping about 18%.