Bank bashing is something of an Australian national pastime but, far from being driven solely by envy at their success, there are sound economic reasons to think the big four make way too much money.

Australia's major banks delivered combined cash earnings of nearly $15 billion over the first half of their financial year (which ends September 30 for three of the big four).

It is an astonishing performance for four financial institutions that are almost entirely focused on the globally tiny Australasian market (especially now that ANZ has largely ditched its Asian expansion ambitions).

In fact, on 2015 figures compiled by The Banker and released by The Australia Institute, the nation's banks made a total of just over $35 billion that year in pre-tax earnings — the sixth highest in the world, and only just edged out by Canada in fifth.

The other four countries ahead of us were, in order, China, the US, Japan and France — all far more populous countries, with banks that generally have large overseas operations as well.

Australian banks made more money than British ones — and London is the world's true home of international finance.

When bank profits are compared to total economic output, the results are more starkly revealed - Australia is number one.

Australia number one for bank profits

Rank Nation Bank profit share of GDP % 1 Australia 2.9 2 China 2.8 3 Sweden 2.6 4 Canada 2.3 5 Netherlands 1.9 6 Spain 1.8 7 France 1.7 8 Japan 1.4 9 US 1.2 10 UK 0.9

Source: The Banker, IMF, TAI calculations

More money to the ticket-clippers

Some might argue we should be proud. Australia's big banks have a return on equity that is only dreamt of in other nations, averaging around 15 per cent, when 10 is now considered a damn good performance elsewhere.

Surely that means we have really well managed banks that deserve to be rewarded for their business acumen with these outsized profits? Surely healthy, profitable banks are a good thing for the economy?

The evidence supports neither of those claims.

On the first front, rather than world-class management, it seems far more likely that Australian banks have profited from a relatively insulated oligopoly that has focused on 'safe' and high-margin mortgages.

So safe were these mortgages considered by the regulator that it let the big four banks and Macquarie tell it how much money they thought they should put aside to cover potential losses.

What a shock then that Australia's major banks lowered the "risk weight" on mortgages from 50 per cent prior to 2004 down to lows below 15 per cent.

In practice, this meant that banks went from holding around $5 in capital for every $100 of home loans outstanding to as little as $1.50, a wafer thin allowance for potential losses stemming from bad debts.

That in turn meant that banks could make a lot more housing loans without having to raise more capital from their shareholders, supercharging profits ... and also Australia's housing booms.

The bank regulator has now introduced a minimum average housing risk weight of 25 per cent, but this is still half what it used to be (and remember that we've had a global financial crisis caused by dodgy home lending in the US in the meantime) and a quarter of the 100 per cent risk weight that applies to most non-housing loans.

That brings us to the second point about bigger bank profits not being good for the economy.

In the orthodox economic conception, banks are allocators of capital — some people are net savers and need somewhere safe to park their money and some people need to borrow to invest, banks are the bridge that brings them together.

However, bigger bank profits generally mean there are higher tolls being charged to cross that bridge, which means savers are getting smaller returns and borrowers are paying higher costs.

That means more money to the ticket-clippers (banks) and less money to both consumers and productive enterprises. Intuitively this is not good for the economy.

Finance sector growth reduces economic growth: BIS

But you don't need to trust intuition or take my word for it that too much banking is bad for economic growth.

The Bank for International Settlements — the central bank of central banks — has released two papers that come to the same conclusion and give two additional reasons why too much banking is a bad thing.

The first is that banks are often not efficient allocators of capital.

In fact, partly due to the regulations that favour housing loans over others, banks tend to lend money to high-collateral, apparently low-risk projects that don't add to the economy's productivity, and therefore don't add much to long-term, sustainable growth.

"Financial sector growth benefits disproportionately high collateral/low productivity projects," wrote Stephen Cecchetti and Enisse Kharroubi from the BIS Monetary and Economic Department.

"This mechanism reflects the fact that periods of high financial sector growth often coincide with the strong development in sectors like construction, where returns on projects are relatively easy to pledge as collateral but productivity (growth) is relatively low."

Sound familiar? It would if you live in Melbourne or Sydney and, to a lesser extent, Brisbane, where cranes currently dominate the CBD skylines.

While these BIS economists are not representing an official position of the bank, their working papers highlight how banks not only fail to support an innovation nation, but actually impede it.

This occurs not only because they tend to prefer financing 'safe' low-productivity residential and commercial construction and property flipping, but also because a large and rapidly expanding financial sector soaks up the nation's best minds.

"Finance literally bids rocket scientists away from the satellite industry," the BIS economists argued.

"The result is that people who might have become scientists, who in another age dreamed of curing cancer or flying to Mars, today dream of becoming hedge fund managers."

Most worryingly, their modelling and empirical research suggests it is precisely the type of high-tech, high-productivity and highly profitable industries that are worst affected.

"Specifically, we find that manufacturing sectors that are either R&D-intensive (research and development) or dependent on external finance suffer disproportionate reductions in productivity growth when finance booms," the BIS economists observed.

"That is, we confirm the results in the model: by draining resources from the real economy, financial sector growth becomes a drag on real growth."

'Too much of a good thing'

Not that all finance and banking is bad — obviously a modern economy needs access to credit, safe savings and transactions mechanisms and other investment products and advice.

"As is the case with many things in life, with finance you can have too much of a good thing," the BIS researchers concluded.

"That is, at low levels, a larger financial system goes hand in hand with higher productivity growth. But there comes a point — one that many advanced economies passed long ago — where more banking and more credit are associated with lower growth."

They calculate that once the total amount of private debt issued by banks exceeds annual economic output (GDP), the banking sector starts weighing on, rather than assisting, growth.

The effect is quite significant, with the economists' 2012 paper estimating a half-a-percentage-point drag on growth of GDP per worker — bear in mind that 3 per cent per annum is considered solid GDP growth, and that is with a population growing around 1.4 per cent a year.

Australia's banks have assets of more than $4.1 trillion, including almost $2.6 trillion of outstanding loans

With Australia's annual GDP currently just over $1.6 trillion, that puts total bank assets at more than two-and-a-half times the size of the economy and outstanding loans around 160 per cent of GDP.

Under either measure, Australia's bloated banking sector is likely to be subtracting a substantial amount from the nation's productivity and economic growth.