A decision to downgrade the credit ratings of 23 small lenders has undermined the Turnbull government's planned big bank levy.
"Competition in banking took a backward step," ME Bank boss Jamie McPhee said of the decision on Monday by ratings agency Standard & Poor's.
But S&P retained its ratings on the big four banks, reflecting expectations of support from the federal government if there was a housing crash.
S&P's had increased the advantage the major banks enjoy from being 'too big to fail', Mr McPhee said in a statement on Thursday.
The federal government had said its six basis point levy on the big banks would help support banking industry competition.
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