Malcolm Turnbull is facing further defiance from his backbench with Nationals senator Barry O'Sullivan circulating draft laws to set up an inquiry into the banks.
While the prime minister has long rejected calls for a royal commission into the banks, Senator O'Sullivan has handed his bill to Labor, crossbenchers and coalition colleagues for their consideration over the weekend before the Senate sits next week.
Having scrapped next week's sitting of the House of Representatives, the prime minister was now being openly defied by his backbench, Opposition leader Bill Shorten said.
"The game is up - it's time for Mr Turnbull support Labor's royal commission into the banks," Mr Shorten said.
The bill would set up a three-member commission of inquiry which would have the powers of a royal commission and whistleblower protections.
Among the terms of reference would be to examine unethical and unlawful conduct in the banking, superannuation, insurance and financial services sector.
It would also look at whether regulators and laws are effective, proper dispute resolution processes are in place and whether an independent body should administer a mandatory code of banking practice.
A royal commission would require the endorsement of the government, which the prime minister says won't be given because regulators have already been given tougher powers to deal with bank misconduct.
But even if it was a commission of inquiry, it would still need government support to pay for it.
Meanwhile, former prime minister John Howard has weighed in on the banking royal commission issue, likening it to "rank socialism".
"I would be staggered if the coalition proposed a banking royal commission, that is rank socialism," Mr Howard told Sky News.
He said this was not the way to deal with misconduct in the banking sector, while reminding people the banks were the best run, most prudentially supervised and most well capitalised during the global financial crisis.
Mr Howard said conservative MPs should not embrace a royal commission in retaliation for co-operation on the same-sex marriage issue.
"I agreed with those people in the National party on the substance of the same-sex marriage issue, but that is over," Mr Howard said.
Earlier, Treasurer Scott Morrison downplayed a report of him meeting with the heads of the big four banks against the backdrop of renewed calls for a royal commission, saying he meets with them all the time.
"I meet with the banks on a regular basis. That's one of my responsibilities as treasurer and I do so in particular with the chairs. I speak to the CEOs and executives as you would expect me to do," he told reporters in Sydney.
He said he was having discussions with a number of them on Thursday about some "legacy cases" where people have had issues with the banks and will impress on them these cases need to be resolved.
