Ms Banks excoriated the “reactionary right wing” within the Coalition for its role in toppling Malcolm Turnbull as prime minister, and praised the “sensible centrist Liberal values” of colleagues like Julie Bishop.
Ms Banks announced her decision in the House of Reps chamber on Tuesday, just as prime minister Scott Morrison was on live television on the other side of Parliament House, announcing the date of the 2019 Budget.
The resignation follows a string of Liberal women criticising the party for a culture that permitted bullying and stand-over tactics, particularly during the recent leadership spill.
Ms Banks criticised the two major parties for playing “political games” and point-scoring instead of working in the interests of Australians.
The moderate MP guaranteed the government her vote on matters of confidence and supply – a similar level of assurance to that guaranteed by Queensland independent Bob Katter.
That means she will vote to allow the government to function, by voting down any motions of 'no confidence' in Mr Morrison or attempts to block the flow of money in the Federal Budget.
But it does not guarantee her support on individual pieces of legislation.
SBS News understands Julia Banks did not tell the Coalition partyroom meeting, held earlier on Tuesday, that she intended to quit later in the day.
"I think if you've been elected as a Liberal, you should serve as a Liberal," Liberal MP Tim Wilson said, asked for his reaction as he left the chamber.
One Liberal senator was unaware of Ms Banks' decision when she was asked about it by reporters.
"She's moving to crossbench?" Senator Lucy Gichuhi said.
'Sometimes you just have to do what you need to do. Julia has a case, and I think on the issue affecting the Liberal party and women, we can't hide our face in the sand."
Lucy Gichihi reacts to Julie Banks leaving tbe Liberal party
Labor's shadow treasurer Chris Bowen said the move showed Mr Morrison was not in control of his own party.
"The biggest contribution Scott Morrison has made since becoming Prime Minister is having two less Liberal MPs," Mr Bowen said.
Greens leader Richard Di Natale reacted to the news at a press conference at Parliament House, saying Liberal MPs were "dropping like flies".