Regional banks call for action

Regional banks are urging the government to make lifting the competitiveness of smaller lenders a central goal of the financial system inquiry, saying the probe presents a rare chance to level the playing field.

In response to draft terms of reference released last month, Suncorp and Bank of Queensland have sought to ensure concerns about big bank dominance are not subsumed by broader issues such as the economy's funding needs.

The chief executive of Suncorp's banking arm, John Nesbitt, said "future proofing" the competitiveness of the regional banks should be a key priority for the inquiry, to be led by former Commonwealth Bank boss David Murray.

Specifically, Mr Nesbitt identified the "disproportionate" cost that regulatory change inflicted on smaller banks, and rules that allow larger banks to set aside less capital for every dollar lent out.

"Australia wants and needs a strong multi-tiered financial services sector and this inquiry presents a once-in-a-generation opportunity to do something meaningful in support of that objective," Mr Nesbitt said in a letter to Treasury.

It is understood Bank of Queensland also reiterated concerns with Treasury about rules that allow big banks to set aside relatively less capital because they are seen to have more sophisticated risk systems.

BoQ argued that if its systems are accredited so that it can also hold less capital relative to its outstanding loans, the rules should be consistent with those governing the big four.

It also reaffirmed concerns that big banks have access to cheaper funding because investors assume they would be bailed by taxpayers in the event of financial difficulties.

The other large regional lender, Bendigo and Adelaide Bank, has also previously argued that regulation should be a top priority for Mr Murray.

Under draft terms of reference, Mr Murray and a four-member panel will be tasked with developing recommendations on how to create a more flexible and competitive system, without compromising stability.

Commonwealth Bank, ANZ Bank, NAB and Westpac - which have a combined market share of 83 per cent in home lending - have welcomed the broad scope. But smaller rivals are keen to put the focus on the big banks' market dominance.

The chief executive of the country's biggest credit union CUA, Chris Whitehead, echoed concerns about access to funding and argued for rules forcing banks that have multiple brands to more clearly disclose their ownership.

As well as policy changes, he conceded the customer-owned sector also needed to get its "house in order" to be a serious competitive force, which is likely to include more mergers.

"We think there's still more consolidation to happen," Mr Whitehead said. "If you are going to compete then the reality is you have to have the strength in terms of scale and funding diversity."