The big four banks' domination of the market means a big enough external shock could bring them all down in one go, the banking regulator has warned.
Australian Prudential Regulation Authority executive Charles Littrell says Australia's banking system is the most concentrated it has ever been.
Mr Littrell said Commonwealth Bank, Westpac, National Australia Bank and ANZ had doubled their total market share since 1990 to 80 per cent.
"They're all in the same business model, they're all hugely exposed to each other: inevitably if you bet 80 per cent of the market, any trading market, you're 80 per cent of each other's books," he told the CIFR Showcase in Banking in Sydney on Thursday.
"We don't quite know what would happen if that business model gets whacked by external stress all at once."
Mr Littrell said APRA had been doing a lot of conventional work focusing on sound lending and it had dialling up its systemic supervisory focus on the commercial real estate sector.
"But behind the scenes there's a lot of work with us, Treasury, RBA and ASIC, on `well if the fundamental assumptions we have made about how the economy works don't turn out to be right, what do we do?'" he said.
"The answer is, we're off in a space in terms of asset valuations, and interest rates, and wealth, and leverage that we've never been in as a country before - and that tends to make us think more conservatively than usual about what our settings should be."
