Providing a government guarantee to all banks should they fall on tough times would expose taxpayers to a significant liability, a new report warns.
Neither does the interim report of the federal government's financial system inquiry back the idea of charging the big four banks for a perceived implicit guarantee.
A number of submissions into the first financial system review in 17 years said large banks receive a funding advantage because of the perception that government's would never let them fail.
They urge that the big four - ANZ Bank, Commonwealth Bank of Australia, National Australia Bank and Westpac - should be charged for such a funding advantage to create a more level playing field, or that all banks be explicitly guaranteed.
But the inquiry headed by former CBA boss David Murray does not consider that there is a case for such change.
"Charging for a perceived funding advantage may strengthen the perception of government support," the report released on Tuesday says.
At the same time, guaranteeing all banks would create a significant moral hazard, expose taxpayers to very large liabilities and put non-bank lenders at a competitive disadvantage.
Instead, it suggests increasing the capital requirements for large financial institutions, strengthening regulatory powers and investing more in pre-planning and pre-positioning for financial failure.
Overall, the review believes Australia's banking sector is competitive.
It says the four pillar policy that prevents mergers between the big four banks remains appropriate.
It says further significant concentration would potentially limit competitive pressure in the market and reduce the choices available to Australian individuals and firms.
A six pillars policy was first introduced in 1990 and included AMP and National Mutual.
This was cut to the four banks after the Wallis inquiry in 1997.
The final report and recommendations for Mr Murray's review are due in November.
KEY OBSERVATIONS OF INTERIM FINANCIAL SYSTEM REVIEW
*Banking sector is competitive but concentrated
*Perceptions that some institutions are "too big to fail" need to be addressed
*Perceptions that big banks benefit from a funding advantage need to be addressed
*Need for efficiencies and stability in superannuation system
*Superannuation policy lacks stability
*Superannuation fees appear high by international standards
*Current disclosure regime produces overly complex and long documents
*Improving adviser competence can improve quality of advice
*Regulatory and tax factors are limiting development of domestic bond market
*Regulators are generally strong and well regarded but independence and accountability can be increased
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