The consumer watchdog wants the "four pillars" policy that prevents big bank mergers to be put under the microscope, saying there is an argument it insulates the banks from fierce competition.
Amid fierce political pressure on banks, the Australian Competition and Consumer Commission says it is time for a "serious" look at the "four pillars" policy, which has been accepted by Labor and Coalition governments since the early 1990s.
In a submission to the Productivity Commission, the ACCC says there are two schools of thought on whether the policy to rule out mergers among the big four is still serving its original intent.
The ACCC stresses is has not formed "final views" on the issue, but it wants the policy explored in detail by the Productivity Commission's inquiry into financial services competition.
If the policy is giving the major banks "advantages," the ACCC says the inquiry should consider if it might be extended to other banks, to stop big banks from gobbling up smaller rivals that threaten them.
The ACCC's submission points to a long-running debate on the "four pillars" policy.
One perspective - and the government's stated policy objective - is that it prevents further concentration in retail banking. ANZ Bank, Commonwealth Bank, National Australia Bank and Westpac already control about 80 per cent of the market between them.
However, the ACCC says there is the counter argument that the "four pillars" protects the big four from competition, because it entrenches the idea they would be rescued by taxpayers.
"Arguably the effect of the "four pillars" policy in addition to the implicit guarantee and prudential measures entrenches the large banks' strong position in relevant markets and reinforces their "too big to fail" status," its submission to the Productivity Commission said.
"Whether this limits the ability of new entrants and smaller banks to constrain the large banks is a question we consider warrants further consideration."
"We invite the PC to consider the operation and scope of the "four pillars" policy, including whether the policy considerations that underpin the policy remain."
The ACCC, which was this year given a wider mandate to monitor competition in the financial sector, has not previously called for re-examination of the "four pillars" policy.
Chairman Rod Sims said PC inquiry was a opportunity to interrogate "divergent views" on the subject.
"We're looking at it in both ways. Should it on the one hand be gotten rid of because of the implicit guarantees involved ... or should indeed it be extended to make sure that the big banks don't get bigger?" Mr Sims told Fairfax Media.
"We're saying look at it both ways, give it some serious thought."
The submission from the ACCC also paints a bleak picture of the state of competition in retail banking, saying the market is "not vigorously competitive, and has not been for some time."
It said the current market structure was made up of "oligopolies" in which the biggest banks had sustained "very high margins" compared with overseas, "largely unchallenged" by smaller rivals.
It highlights the banks' focus on return on equity, a key measure of profitability, saying the big four's high profits may not be a "reward for repeated exceptional performance," but rather a reflection of competitors being "handicapped".
"We've had a concern for some time that banks are growing their profits, growing their market share, and the other players just don't seem to be able to break through a challenge them," Mr Sims said.
Smaller banks have argued in recent years they are at a persistent disadvantage to the big four from regulations that allow the majors to have less shareholder capital for every dollar loaned out, because of their more advanced risk systems.
Credit ratings agency Standard & Poor's also gives the big four banks a higher rating, allowing them to access cheaper funding, because of the assumption they would receive greater taxpayer support in a crisis.
This year's budget set up the ACCC's financial services unit, which is currently inquiring into mortgage pricing, but will have a standing remit to look at competition in banking from mid next year. Mr Sims signalled the unit would be taking a keen interest in whether regulation that promotes stability in banking was inhibiting competition.
