Bank executives have been put on notice to improve their behaviour or face substantial fines, and even disqualification, if they do not uphold better standards.
The Senate passed the Turnbull government's banking executive accountability regime through bipartisan support of the major parties, which is due to start on July 1 for the big banks and a year later for small ones.
"These measures will incentivise good behaviour and ensure that banks and individuals are held to account where they fail to meet the standards expected of them," Treasurer Scott Morrison said in a statement.
The new laws come a week before the financial sector faces a royal commission.
The Productivity Commission has given those proceedings food for thought with its draft report into competition in the financial sector.
It described the 'Four Pillars' policy that prevents the major banks from merging to ensure competition as "redundant".
"It is also not clear that the Four Pillars policy has met its stated objective of preserving competition, or whether instead it has eroded competition by embedding a fixed market structure," the report said.
But Prime Minister Malcolm Turnbull said the policy has been part of the financial sector for many years and expects it to remain so for many years to come.
"I can assure you we have no intention of contemplating mergers between the big four banks," Mr Turnbull told parliament.
Shadow treasurer Chris Bowen said the Four Pillars approach remains integral to the nation's financial stability.
"It was important in Australia getting through the global financial crisis," Mr Bowen told reporters in Canberra on Wednesday.
The policy was introduced by the Hawke Labor government in 1990 and remained in place after a subsequent review by the Howard coalition government years later.
The report, ordered by Mr Morrison, also found no government agency was specifically tasked with overseeing and promoting banking competition.
Additionally, the commission said a regulatory clamp-down last year on new interest-only home loan applications for investors may have actually provided a windfall for the banks.
It argued the action by APRA has resulted in higher interest rates on both new and existing investment loans.
"Up to half of the increase in lenders' profit was in effect paid for by taxpayers, as interest on investment loans is tax deductible," the report said.
The estimated cost borne by taxpayers is up to $500 million a year.
Mr Bowen said it was another reason to fix negative gearing.
"Because Scott Morrison has left the heavy lifting to the regulators ... banks have increased their profit margins and that has been subsidised by the taxpayer due to negative gearing," said Mr Bowen, who wants to limit the tax concession to new properties.
But Mr Morrison disagreed, telling parliament on that thinking every time the Reserve Bank decides to lift the cash rate, it is somehow a tax on the taxpayer.
The commission's final report is due to be handed to the government in July.
