As the first round of submissions to the Federal Government's Financial Systems Inquiry closed this week there was a timely reminder that the fundamental cause of the global financial crisis is still deeply embedded in the banking system.

The world's wealthiest and most powerful banks still operate behind the shield of being "too-big-to-fail" (TBTF), an issue that former US Federal Reserve chairman Ben Bernanke fingered as a major factor in the meltdown and the ensuing economic calamity that still haunts markets and economies worldwide.

Both the International Monetary Fund and the Fed have just published studies showing that, not only did the TBTF policy encourage a coterie of banks to place bigger and riskier bets, it is the taxpayer who largely underwrites the whole operation.

A team of economists in the Fed's New York office were first out of the blocks last week with a study of more than 200 banks in 45 countries which found "an increase in government support leads to a higher ratio of impaired loans" - that is loans in default or close to default.

The study was based on 2009 data, so it did not include the impact of any recent reforms.

However it did analyse so-called behavioural issues, such as whether banks that ratings agencies classify as likely to receive government support, increase their risk taking.

On the question of behaviour and the interaction of ratings agencies, the Fed study is fairly blunt.

"The results show ... that a greater likelihood of government support leads to a rise in bank risk taking," the report concluded.

The IMF study, published this week, found something similar, but managed to put some numbers on the cost to taxpayers.

The big banks in the US were subsidised by up to $US70 billion in 2012. In Europe it was up to $US300 billion and in the UK and Japan up to $US110 billion.

Globally, the IMF says the TBTF subsidies are provided in a variety forms, from loan guarantees to direct cash injections.

That insurance policy allows the big banks to borrow at far lower rates than their less protected smaller rivals.

As the IMF notes, "those lower funding costs represent an implicit public subsidy to large banks."

Banks bigger and costlier

Rather than reining in TBTF banks, the GFC has only made them bigger and costlier to support.

The collapse of Lehman Brothers in September 2008 was central to how the TBTF gang have become even stronger.

The IMF says ensuring turmoil after the collapse meant that Governments were forced "to intervene massively to maintain confidence in the banking sector, and prevent the collapse of the whole financial system".

That concerted action left little doubt that a big bank would never again be allowed to fail.

Emboldened by this happy news, creditors had little need to check on the behaviour of the banks and the banks could go on jacking up their leverage and risk.

At the same time banks grew bigger, they shrank in number as wave of consolidation driven by governments and central banks was unleashed. The IMF says that, as a result, subsidies to the big banks have risen significantly around the world.

Another by-product of the consolidation has been the heightened risk.

As the IMF notes, a big bank in distress could easily destabilise a nation's entire financial system as "its activities may not be easily replaced by other institutions and because it is likely to be highly interconnected with other banks."

Big Four estimated to reap billions

Unfortunately Australia's big banks did not make the cut for the IMF study, and little work has been done on just what it costs the taxpayer here.

In December, the banks' regulator, APRA, said that while no Australian bank was currently on the global too-big-to-fail list (also known as the Global Systematically Important Banks, or G-SIBs for short), the Big Four should now be included.

Given that CBA, Westpac, NAB and ANZ have assets that when added together are equivalent to one and half times Australia's GDP, it is a reasonable call to say they are systematically important.

A private research outfit, Morgij Analytics, recently dug a bit deeper and commissioned a paper looking at the hidden costs of the implicit government guarantees in the Australian financial system.

It came up with a rather jaw dropping figure of $11.1 billion as the aggregate tax payer funded subsidy in Australia.

That includes a funding advantage of $2.5 billion for the TBTF implicit government guarantee and $4.5 billion for underpricing the fee associated with the Committed Liquidity Facility.

It is difficult to assess just how exact the costs are, but the research does highlight widely held belief that the big banks enjoy government largesse well beyond that afforded to their smaller competitors.

It is an argument hotly disputed by the Big Four. The CBA in its submission to the Financial System Inquiry argues that there is "not an implicit guarantee for the major banks", rather there is "general support for the whole banking system".

The smaller regional players are not so sure and say the Federal Government should declare whether it would allow some lenders to perish in the event of another financial crisis.

That is not to say that completely removing government support is a likely, or even appropriate, outcome.

However, the IMF argues increasing banks' capital requirements and recouping taxpayers' costs through a financial stability tax are the reforms policy makers should be pursuing.

They are exactly the sort of policies the big Australian banks will be arguing strenuously against in the inquiry.

The issue of banks being too-big-to-fail and the moral hazard that entails did not quite make the FSI's terms of reference despite the unhealthy appetite for risky lending it seems to inspire, and the central role it played in the GFC.

Maybe it is one for the next banking inquiry which, at the current rate, should be due around 2030.