When James Wheeldon was a young lawyer working at the Australian Securities and Investments Commission, he had to report to a senior lawyer working at the corporate regulator, a lawyer who was on secondment from National Australia Bank.

“My job as a lawyer was to deliver for the banks,” Wheeldon said in the wake of the dramatic revelations at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry this week.

“It didn’t matter what the policy implications were, everything I did was about fees. And ASIC has been a knowing, willing participant, even collaborator, in their dishonest effort to increase fees.

“It’s like Roger Rogerson giving the green light to Neddy Smith – we are okay with you doing this.”

When governments allow private institutions the cherished status of being too big to fail, risks are taken with the comfort of impunity.

The picture Wheeldon paints is of a completely failed institution. “ASIC has a deeply ingrained culture of subservience towards the major financial institutions,” he says.

“As a lawyer in the regulatory policy branch, I routinely saw large financial institutions regularly make dishonest representations to ASIC. Their lawyers, too. And I complained and they did nothing.

“I complained that the banks lied to ASIC, that ASIC tolerated it, that ASIC amended the Corporations Act for the benefit of the banks in order to assist them in ripping off their customers.”

Wheeldon’s complaints fell on deaf ears. Disillusioned by the fact he was compelled to do the bidding of the big banks and their lobby group, now called the Financial Services Council, he left in disgust. He now works as a barrister specialising in Corporations Act cases.

This week, the third of the royal commission’s sitting, was all about fees. Testimony emerged of fraud, dishonesty, greed and incompetence by hundreds of bank-aligned financial planners. The commission heard Commonwealth Bank even charged dead people fees for financial advice. In one case these fees were charged for a decade after a person had died.

There was evidence of chronic fee gouging, charging for services never provided, misleading regulators, of AMP’s board of directors tampering with an “independent expert” report destined for ASIC. Life savings were lost in a litany of law breaking by the biggest blue-chip institutions in the land.

The treasurer, Scott Morrison, said he was “reassured” ASIC was investigating some of these claims – at odds with what the commission has shown about the deficiencies of that reassurance. He invoked the jail time that is almost never a response to corporate malfeasance.

“They have said that they basically charged people for services they didn’t provide and they have admitted to statements that were misleading to ASIC and to their own customers, and this is deeply distressing,” Morrison said. “This type of behaviour can attract penalties which include jail time. That’s how serious these things are.”

Barnaby Joyce, who refused multiple calls for a royal commission while he was deputy prime minister, speculated on whether the banks should be broken up. He said they had succumbed to conflicts of interest and temptation and “blatantly taken the support of government” as justification.

“I have apologised for being so naive to have swallowed their line of ‘we are good corporate citizens’,” he said in a statement. “Maybe they should now as well.”

AMP was first to be questioned in the unfolding fee-for-no-service scandal. CBA also spent time in the box. So did Westpac. The other major banks are yet to come. The sharpies from Macquarie Bank didn’t even get the call-up, the commission’s time frame too short to cover their actions.

As it stands, AMP misled ASIC with such frequency and such little consequence that the bank could not accurately recall on how many occasions it had erred into deception.

“By my count this was the 14th false or misleading statement by AMP to ASIC? ... You’re losing count,” senior counsel assisting the commission Michael Hodge said to AMP executive Jack Regan.

“I’m in your hands in that regard, Mr Hodge,” Regan replied.

Later: “I think that takes us to 17 false or misleading statements by my count, Mr Regan,” Hodge said.

“Were you counting that as one or two?” Regan replied.

“I only counted that as one – do you think I should count it as two?”

“I think in fairness, Mr Hodge, you should.”

“Okay. The 18th false or misleading statement by AMP to ASIC.”

The count was hovering at 20 by end of session. When the year is out, it will seem insignificant in light of the number of indiscretions in the financial advisory sphere. And this does not include credit card shenanigans, mortgage fraud, market rigging or systematic breaches of the anti-money laundering and counterterrorism financing laws.

Corruption is an entrenched culture in banking. Nothing has changed for two decades. I can say this with fair authority, having personally fielded complaints about the banks, ASIC and the Financial Ombudsman Service for two decades.

The royal commission will trip from one scandal to the next. Like Donald Trump, people will get used to it. Stories of corruption and malpractice will flow like a raging torrent. The number of ruined lives will mount, the stories of entire savings lost on bad or rapacious advice. The essential question is, what will come out of it?

Regulatory capture is merely part of the picture. It is symptomatic of a more potent, more tricky issue, and that is “moral hazard”.

It is not universally understood by Australians but the banks are underpinned by taxpayers via the Reserve Bank’s Committed Liquidity Facility, effectively a bailout fund that the RBA hates to hear described as a bailout fund.

Thanks to this facility, the banks are deemed too big to fail. When governments allow private institutions the cherished status of being too big to fail, risks are taken with the comfort of impunity. This risk is not properly priced in a natural market, it fuels leverage in the financial system and throws up the spectre of a “hard landing”.

Whether to prop up the banks, however, is not a clear-cut issue. Sovereign guarantees and the “four pillars policy” have served Australia well in many ways. By four pillars, we mean the policy of keeping the four big banks immune from takeover.

It has left us with a powerful oligopoly, though, and one that is demonstrably failing to look after customers by the thousands. It has also buttressed the financial system against external shocks. So it was that, in counterpoint to the ructions that beset other economies, Australia’s financial system sailed through the global financial crisis.

The fact is, successive governments and their regulators have favoured system stability over competition and attentive regulation. The greater fear is not the suffering of customers and corruption in the banks, it is of a gigantic collapse.

A situation has been allowed to develop by political acquiescence and regulatory inertia where the concentration of power and wealth is at dangerous levels.

We are left with one leviathan institution of sorts, a vertically integrated fee monster, a lending oligopoly of four institutions with interlocking shareholdings, interlocking interests, and with 80 per cent of the market share. The Big Four enjoy a lower cost of capital than other lenders, hence a lending advantage over smaller banks and non-bank lenders thanks to sovereign guarantees.

The GFC also delivered them a deposits guarantee, and a capital-raising guarantee, both now expired, which enabled them to use the government as a backer to raise money on international bond markets more cheaply.

As they waded into money markets overseas, foreign investors paid more for their bonds. That is, they accepted a lower yield, because they knew that the risk was lower with Australian banks. Those risks were lower because the taxpayer stood behind them with a guarantee.

What did they do with all this cheap money? The mostly lent it to home-buyers and investors to buy property. The property market therefore is sky-high, among the highest in the world on some measures.

Money laundering and terrorism financing reform has been put off for almost a decade because successive governments have been lobbied to do nothing.

The flood of money from Chinese investors has spurred the highest residential property prices in the world, a market that is overcooked and which needs to be protected from collapse.

Due to the concentration of the banks’ business risk in residential property, there is now a sovereign risk of unnatural proportions.

No matter what emerges from the royal commission, therefore, the government’s primary interest will still be in maintaining confidence in the system – system stability.

All sorts of things are skewed. Young people can’t afford a house, lending to small businesses is relatively low. It is preferable to lend to property speculators than farmers because the banks know the government will pull every string it can to protect the property market from collapse.

This is perhaps why the banks are considered good corporate citizens. Unlike many other large corporations, when it comes to paying income tax, the Big Four pay well over $10 billion a year.

How can a government reform the culture, even with overwhelming evidence of bad behaviour emanating from the royal commission, when its overarching interest is in protecting the banks?

This week, the vexing challenges of vertical integration came into view: five big institutions, including AMP, all regarded as too big to fail, mollycoddled by the authorities at the highest level.

As some commentators point out, the banks are moving to offload their wealth management divisions. CBA confirmed as much this week and ANZ has already flagged its exit. This is market-driven: the returns are too low for the capital allotted, and it may diminish predatory behaviour by the Big Four.

The catharsis and pageantry of the royal commission will have a salutary effect on the banking sector. It will restrain poor behaviour for a while and, at the margin, will adjust culture. But, as James Wheeldon says, by way of comparison, ASIC takes Australian Financial Services Licences off financial planners all the time. “Are they going to do it to AMP? Not a chance.”

The culture is set. Ultimately, regulatory capture and moral hazard will prevail as governments prioritise system stability over prosecuting bankers. This also means they will prioritise the status quo over substantial reform to the banks and regulatory agencies.

The irony is that the risk they hoped to avoid is the very risk that now looms larger. Protecting the banks like this can only lead to a system with untenable leverage and enormous national risk.

And the commission continues. Finance Minister Mathias Cormann has said the government will consider extending its deadline on the basis of evidence heard this week.