Closer scrutiny of the banking industry and stricter government regulation do not necessarily mean that competitive environment would be introduced in the sector, it's all about healthy consultation between the government and industry players.

This according to the Commonwealth Bank of Australia (CBA) as it cautioned the federal government from effecting new reforms on the existing banking regulations, stressing that such measures would not enhance industry competition at all.

CBA chief executive Ralph Norris said on his Senate submission that amidst the raging banking debate, sufficient competition has been in effect in the industry and government reforms would hardly make a dent on banking dynamics.

Norris said that the worldwide financial downturn fuelled the banking sector's upward surge on funding costs and bringing it down, or at least settling it to the so-called normal level would be a remote possibility for now.

Apart from the movement of Australia's interest rates, the CBA boss said that banks' funding costs are also affected by other factors and that reality was even confirmed by the latest pronouncements of the Reserve Bank of Australia (RBA).

In its report to the Senate banking inquiry, the Australian central bank had alluded on November that the country's banks funding costs have soared since the onset of the global financial crisis.

The RBA submission also stressed that "the effect of these changes on banks' overall funding costs has been accentuated by a shift in banks' funding mix towards these more expensive types of funding."

Also, CBA said that the industry's good showing this year, specifically the record profit chalked up by Australia's for major banks, should be interpreted with utmost consideration to the sheer size of each of the four institution.

Norris argued that in so far as the headline profit numbers are concerned, observers should carefully consider that "the Australian banks in 2010 generated return on equity and return on assets broadly in line with the 30-year average for the banking sector."

To effectively deal with the banking sector's contentious issues, the Commonwealth Bank urged the federal government to consider a dialogue with players of the industry in order to effectively arrive at a viable solution to its so-called ills.

That suggestion was supported by Westpac, which declared on its statement on Monday that consultation and not regulation is the key in threshing out the tangling issues of the banking industry.

A healthy dialogue on the welfare of the industry should encourage the introduction of a more competitive environment in the sector, which should also "strengthen the resilience of our banking system and have the greatest positive impact on the provision of financial services to Australian households and businesses in the short and medium-term."