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If you believe the conservative line, Australia’s banks are not only too big to fail but too fragile to be openly investigated.

The argument goes like this: yes, the financial sector has behaved very badly, even criminally; but the establishment of a royal commission to examine the seemingly endless stream of scandals could lead to a devastating loss of confidence.

It’s an odd line to run, not least because it clearly presupposes such a commission would turn up evidence of behaviour that would shock us even more than we have been shocked by the serial revelations of malfeasance over the past decade. Still, they are flogging it for all it is worth.

None more dramatically than Warwick McKibbin, conservative economist from the ANU and Howard government appointee to the Reserve Bank board (2001-11), who seems to suggest a royal commission into the banks would be dangerous on a global scale.

“If you look at the state of the world economy at the moment, there’s a lot of fragility,” he tells The Saturday Paper.

“The politics of this is very dangerous in the way in which it could affect people’s confidence.

“I wouldn’t say you should never have one ever, but I think at this point it really isn’t the right time. Not now, when the global financial system is on the verge of a major crisis.”

Treasurer Scott Morrison has spent the past week running variations on the same theme. Essentially, bad things will happen if you undermine confidence in the financial sector by inquiring into it.

The parallels with the ABCC issue make it much harder for the government to run a coherent defence against a royal commission into the finance sector.

“Let’s not forget there are 430-odd-thousand people who worked in the finance sector,” he noted on Sky News. “Let’s not forget that our banking finance sector underpins everything that happens in our economy.”

And again on Radio National Breakfast the next day: “For Bill Shorten to go down this path, I think, it is a reckless distraction that puts at risk confidence in the banking system…”

The obvious question is: What confidence?

Even conservative columnists such as Niki Savva, former staffer of treasurer Peter Costello and now a News Corp commentator, admit there are problems, just not that they warrant a royal commission. As Savva wrote on Thursday: “Yes the banks are bastards. There is probably not a single adult Australian who hasn’t had a beef with a bank. Faced with a series of scandals, the banks, with the arrogance which attaches to many big businesses, have done too little too late to prevent it getting to this point. Even so a royal commission will achieve little that their boards, the government and the various agencies charged with the task of monitoring them cannot – except possibly undermine confidence in the financial system.”

1 . Labor's motivation

The list of claims of financial sector malfeasance is too long to fully enumerate here. Its scope ranges from tax dodging, to conflicted investment advice, to heartless efforts to avoid insurance payouts, to the pursuit of small investors who lost their savings through bank-financed fraudulent investment schemes, to foreclosing on drought-stricken farmers who have fallen behind on their covertly restructured loans by minuscule amounts, to colluding to manipulate interest rates.

A list of notable developments relating to the various scandals involving just the big four banks and Macquarie Bank, catalogued and scrupulously footnoted by Labor and provided to The Saturday Paper, runs to four closely spaced pages and more than 70 items.

But the opponents of a royal commission wave the weight of evidence away as though it were a minor matter being exploited for political ends.

As Scott Morrison told Fran Kelly: “On the eve of an election, when there are a few reports about banks, Bill Shorten is up there in his ill-fitting suit, puffing his chest up and saying we need to thump the table.”

No doubt Labor’s call for a royal commission is political, says former senior bank economist, now vice-chancellor’s fellow at the University of Tasmania, Saul Eslake: “There is obviously a bit of tit for tat about the trade unions royal commission: You had a royal commission into our mates, we are going to have one into yours.”

But political convenience does not necessarily obviate good policy, as the government itself argues in relation to the unions royal commission and its subsequent threat to call a double dissolution election if the parliament does not pass its legislation to reinstate the Australian Building and Construction Commission.

The parallels between the two issues make it much harder for the government to run a coherent defence against a royal commission into the finance sector.

The government line is that the building industry needs a “tough cop on the beat”, in the form of the ABCC. Labor and the unions argue there already are tough cops on the beat: the police and the Fair Work Commission’s construction sector.

In the case of the banks, the party positions are reversed: the government insists there is already a tough cop on the beat, the Australian Securities and Investments Commission; Labor argues otherwise.

2 . ASIC's powers

So how tough is ASIC, really? The 2014 report of a senate inquiry into ASIC’s handling of financial scandals was utterly damning.

“ASIC has limited powers and resources,” it said, “but even so appears to miss or ignore clear and persistent early warning signs of corporate wrongdoing or troubling trends that pose a risk to consumers.”

The committee called for a royal commission into the financial malpractices ASIC had failed to detect.

This was less a revelation than a confirmation. The fact is just about every instance of financial malfeasance over the past five years or more has come to light as a result of whistleblowers going to the media. The Fairfax papers and the ABC, coupled with several parliamentary inquiries, have done far more to expose financial wrongdoing than the official regulators.

Some see nothing odd about that.

“There are small cases of problems in the Australian system but they’ve all been picked up,” McKibbin says.

“It’s also the case that most political and other corruption is picked up not by regulators but by whistleblowers. It is ever thus.”

Except that, as the 2014 senate report noted, there are many examples of whistleblowers who, having had their warnings ignored by the financial institutions for which they worked, have gone to the regulators and also been ignored by them.

But we should not lay all the blame on ASIC, says Patrick McConnell, of Macquarie University’s Applied Finance Centre, a former banker and expert on banking regulation.

“ASIC is set up as the corporate regulator, not the banking regulator. They are stretched too thin. Every time Clive Palmer’s companies get into trouble, or Dick Smith, the first call is on ASIC.”

In his view, Australia is indeed in need of a “tough cop on the beat”.

He points to Britain, which now has something called the Financial Conduct Authority, similar to ASIC except focused solely on the financial sector. He notes also that the record of the financial sector is at least as bad as the construction industry.

Only this week, for example, Goldman Sachs was fined more than $US5 billion for its conduct in the lead-up to the global financial crisis. Tens of billions more have been levied against banks in the United States, Britain and Europe, in relation to their past lending practices and interest rate rigging.

3 . Call for royal commission

Greens senator Peter Whish-Wilson, an economist, former banker and businessman, who was calling for a royal commission a year before Labor jumped on the bandwagon, says ASIC is much softer on wrongdoing.

“ASIC tends to negotiate by settlement through enforceable undertakings rather than throwing people in jail or even imposing big fines, and it’s all done privately.”

A royal commission would be likely to find more evidence of wrongdoing, he says, but more importantly it would put public pressure on financial institutions to change their “toxic” cultures.

“A royal commission will put it in the public eye,” he says, “and I think reputational risk is something the big banks do take seriously.”

ASIC itself argued in its submission to the senate inquiry into its performance that it lacks the weapons to deal with bank misbehaviour. The scope and size of penalties that could be imposed in Australia were way short of those in comparable jurisdictions, it said, and “in many cases, do not meet community expectations”.

Saul Eslake also notes the inadequacy of penalties, not solely in Australia but particularly here.

“There are typically very few penalties for individuals for malfeasance. Usually the institutions are fined. The only thing people have gone to jail for is insider trading.”

Which is interesting, when you think about it. The heavy personal penalties are reserved for people in the financial sector who rip off other people in the financial sector.

4 . Policy options open now

Eslake is not himself convinced of the need for a royal commission, when other corrective measures are more immediately available.

“I’m not pretending for a moment that some people, working for virtually all of the banks, have not done some very bad things over such a period of time and in such a wide range of areas as to indicate major problems with the culture of financial institutions,” he says.

But while a commission would allow “a large group of people with legitimate grievances to vent”, it could also delay necessary reforms.

He suggests several such reforms: tougher penalties for malpractice; the removal of the “perverse incentives” that encourage bank employees to work against the best interests of customers; and involvement of ASIC or the Australian Prudential Regulation Authority, or both, in determining which financial products could be offered to which customers.

“A royal commission will simply delay reforms two years or more,” he says. “But if government really wanted to, there are things it could do right now.”

The trouble is, the current government apparently does not want to police the sector any more rigorously.

We saw evidence of that when, in its first budget, it cut $120 million from ASIC’s budget over four years. We saw further evidence when it moved to undo the Future of Financial Advice reforms brought in by the previous Labor government, which required financial advisers to put the interests of clients first, and to cut out commissions and conflicts of interest on the sale of financial products.

McConnell is unsure if a royal commission is the way to go, but equally sure of the need for change.

“The list of scandals goes on and nobody seems to be held sufficiently responsible,” he says.

“There is a mea culpa, maybe some monies paid, and then we go on to the next one. And the next and the next and the next.

“It’s to do with the way the banks interact with one another at a systemic level. Along the way ethics get lost. At the highest level, all of the banks are doing the same thing, all of the time.”

5 . Public interest

The politics of this are diabolical for the current government. It had hoped to win an election by emphasising its tough approach to union corruption. But, as McConnell says, corruption in the finance sector is at least as pervasive. And it touches the lives of voters in a much more direct way. This week’s Essential poll found electors not very excited about the government’s moves to make union lawlessness a central issue.

It is not that people opposed the ABCC; they just didn’t think it very important compared with other issues the government needed to address. Other polling, for The Australia Institute, showed people would rather see an ICAC-style anti-corruption body instead of one specific to construction unions.

At time of writing, no polls were in on the perceived importance of cleaning up the financial sector – although we understand they are coming.

As Niki Savva says, everyone thinks the banks are bastards. And we have an extraordinary coalition of people calling for action – from the extreme right of the National Party to the Greens on the left, and Nick Xenophon and Labor in between; from farmers to unionists, consumer groups to company directors.

But the government, or at least the executive of the government, led by a former banker, heavily backed by donations from bankers, is holding out against it.

Scott Morrison and the other apologists for the banks may continue to insist the calls for a royal commission are “just politics”. But that’s the game they’re in.

When Bill Shorten was asked the other night, on Channel 10’s The Project, for a response to Morrison’s jibe about his “ill-fitting suit”, he zinged back that Morrison was an “ill-fitting treasurer”.

Shorten, incidentally, was wearing quite a nice suit. More noticeably, he was wearing a grin.