ME Bank chief seeks level playing field on 'too big to fail' issue

The "too big to fail" status of Australia's major banks should be scrutinised in the forthcoming review of the financial system, ME Bank chief executive Jamie McPhee says.

As governments around the world grapple with the "moral hazard" created by very large banks, Mr McPhee said Australia should also debate the implicit guarantee given to the big four.

He made the comments after the industry super fund-backed ME Bank delivered a statutory profit of $40.4 million for the year to June, up from $4.7 million last year.

By the end of this year Treasurer Joe Hockey is set to announce the terms of reference for a sweeping review of the financial system - dubbed "Son of Wallis" after the previous 1997 review.

Banks have argued it should be broad-ranging and not focus solely on competition.

ME Bank is owned by several of the country's biggest industry super funds, and the comments could signal the sector would support looking at tougher measures to rein in the Commonwealth Bank, Westpac, ANZ and NAB.

"All we're looking for is a level playing field. We just want competition to be fair," Mr McPhee told BusinessDay.

The big four benefit from the market's assumption they cannot be allowed to fail through lower funding costs, he said, citing Standard & Poor's view that government support for banks was highly likely in a crisis.

"The too-big-to-fail status of the major banks has been publicly stated by S&P - because of that status S&P gives them a rating two notches higher than would otherwise be the case," he said. "That is actually them being fundamentally underwritten by the general community, the taxpayer," he said.

"I think that issue about fairness and competition should be part of the scope of this review."

Australian banks are not included on a list of 29 globally significant financial institutions developed by the Switzerland-based Financial Stability Board, but regulators are looking at policies for domestically significant institutions.

Potential responses could include measures to force banks to become smaller by divesting assets, or imposing tougher capital rules on the biggest lenders.

ME Bank, which had total assets of $19.6 billion at June 30, previously funded itself through securitisation markets but in recent years has shifted to traditional balance sheet banking.

Securitisation markets have improved in recent months and Mr McPhee said if the trend continued, banks could make further moves to cut home loan interest rates independently of official changes.

"Should funding markets continue to improve, it is a very, very competitive market place out there, so it would not surprise me to see further adjustments in that area," he said.