The competition watchdog has expressed concern that big four bank profits are being boosted by regulation rather than the lenders' own performance.
The Australian Competition and Consumer Commission has asked the Productivity Commission to look at whether regulation could be holding back challengers by giving the giant lenders an unfair advantage over their smaller rivals.
In a submission to the Productivity Commission, the ACCC said the long-standing acceptance by government that the big four banks won't be allowed to merge with each other might be insulating them from competition.
The ACCC said that the so-called 'four pillars' policy - which was designed to prevent further consolidation of the industry - reinforced a perception that the Commonwealth Bank, Westpac, National Australia Bank and ANZ were too big too fail and would be bailed out by government if they hit the rocks.
Smaller lenders not protected from predatory suitors enjoy no such implicit guarantee.
The ACCC said it appeared retail banking in Australia is not vigorously competitive, and had not been for some time.
"It is not clear that sustained high profits of the large banks can be traced to exceptional performance," the ACCC said in its submission.
"To the contrary, there appears to be an element that reflects the degree to which the competitors of the large banks are handicapped in their ability to effectively contest the market."
The ACCC is concerned that smaller rivals may also be hampered in their attempts to challenge CBA, NAB, Westpac and ANZ by the big four's expansion into other financial services, and the difficulty customers face when switching provider.
The ACCC suggests relaxing restrictions on the use of the word "bank", and highlighted the importance of an open banking regime - under which consumers will own their own data and lenders will be obliged to share it with rivals.
Treasurer Scott Morrison will receive a review of the proposed open data regime by the end of the year, with the system slated for introduction in 2018.
