Bendigo and Adelaide Bank has urged the government to put the big banks' dominance under a microscope as part of its inquiry into the financial system, saying the industry lacks a level playing field.
The regional lender's managing director, Mike Hirst, said on Monday that the bank had been fighting "with one hand tied behind our back" in the past few years because new regulations tended to favour the majors.
It comes as smaller banks intensify pressure on Treasurer Joe Hockey to consider curbing the power of Commonwealth Bank, Westpac, ANZ and NAB in the $1.2 trillion home loan market as part of the forthcoming inquiry.
After a wave of regulatory change in recent years, Mr Hirst said the fixed costs of complying with new rules had been a more severe impost for smaller players.
As well, he said, the big four enjoyed significantly lower wholesale borrowing costs because of credit ratings agencies' assumption that taxpayers would come to the rescue if needed.
"I think people often misconstrue the concentrated nature of Australia's financial sector as being anti-competitive," Mr Hirst said at the company's annual meeting in Bendigo.
"I can assure you the market is very competitive. What we don't have, however, is an even playing field that promotes customer choice. Size is a powerful ally in any endeavour. In banking in Australia it provides larger players with funding and regulatory advantages that ultimately restrict consumer choice. That needs to be put under a microscope."
Mr Hirst reiterated criticism of the design of the Rudd government's guarantee on bank borrowing, which required regional banks with lower credit ratings to pay a higher fee when accessing the guarantee.
Mr Hockey is expected to announce the terms of reference for the financial sector inquiry, dubbed "Son of Wallis" after the Wallis review of 1997, before the end of this year. Big banks have argued it should be broader than a review of competition, encompassing the financial sector's contribution to the economy.
But smaller lenders and consumer groups are likely to demand measures to rein in the big banks' power in the mortgage sector, where the majors' combined market share is near 85 per cent.
Bank of Queensland's chief executive, Stuart Grimshaw, this month said there was an "inequity" in current regulations that give the big four and Macquarie a funding advantage by allowing them to set less capital aside against mortgages than the regional banks.
And the chief of industry super-owned ME Bank, Jamie McPhee, last week called for the inquiry to examine the big four's "too big to fail" status.
Mr Hirst did not call for specific policy measures. Instead, he said, the review should investigate how regulation introduced since the global financial crisis had affected different parts of the industry.
"What I'd support is a review of what the cost of regulation is across all players, where are there advantages to some and disadvantages to others, and how do we make sure that the playing field is more even?" he said.
In rules that took effect at the start of this year, banks have been forced to hold larger amounts of capital to absorb losses from bad loans. They will also be required to hold more easy-to-sell assets such as government bonds.
Mr Hirst conceded that many of the changes were warranted and even overdue, but said some of the regulatory change was "a solution looking for a problem".