The collapse of a financial group would be more destabilising than ever, the head of the banking regulator says.
During the past decade, the number of financial entities covered by the Australian Prudential Regulation Authority (APRA) has shrunk from 1,850 to 600.
But the total value of assets has meanwhile more than doubled from $2 trillion to $5 trillion.
The concentration of banking, insurance and superannuation assets could have dire consequences in a crisis, APRA chairman Wayne Byres said.
"The failure of an average entity is likely to be more painful and more destabilising than may have been the case in the past," he told a wealth summit in Sydney.
"The share of the financial system held by the largest financial institutions is as high as it's ever been."
Weak economic conditions, record low interest rates, plummeting commodity prices and high house prices also meant the world was "at extremes".
"There is the potential for a lot of fragility and when there's fragility, there's the potential for significant volatility," he said.
Mr Byres called for a revival of the mortgage-backed securities market to bring non-bank lenders back to the home loan market, where the big banks have entrenched their dominance since the GFC.
"We would certainly like to see a more robust securitisation market up and running," he said.
He also backed the financial system inquiry's recommendations to raise bank capital levels.
"We don't need to wait for every `i' to be dotted and every `t' to be crossed... before we turn our minds to an appropriate response to the FSI's recommendation," he said.
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