Measures taken by the Government over the past couple of years to promote competition in the banking sector have not been effective and more needs to be done, according to a new report.The report, which was prepared by Deloitte Access Economics for the mutuals association, Abacus, calls for a full-scale inquiry into the banking system.Mutuals are at a competitive disadvantage to the major banks, because of increased funding costs and other impediments to competition. The report argues that addressing the distortions in funding costs and regulatory burdens between the major banks and smaller lenders could help restore competition in the banking market.The report said: "While the Government is attempting to restore competition in Australia's banking and financial system, questions remain about how to achieve this."It said Treasury recommended "a comprehensive review of the financial sector regulatory framework" in its brief to the Government after the 2010 election, and it wants this recommendation to be taken up.The report said: "For mutuals to provide effective competition, they need to be able to increase their market share. This will depend on their absolute access to funding, mainly deposits, the cost of funding and their access to regulatory capital and the cost of regulatory capital."It said most changes to the banking system since the financial crisis have favoured the big banks. "The cost of insuring large deposits under the Guarantee Scheme was linked to credit ratings, enabling the AA-rated major banks to offer more attractive rates to depositors."Some of the arguments in the report are not convincing, however. It said: "The opportunity to issue covered bonds is beyond the reach of individual mutuals and feasible only for large groups."In its covered bond rules, the Government made allowance for groups of small institutions to raise funds together. So far, none have done so, which perhaps reflects market conditions rather than a problem with the regulationThe report said: "Stronger account switching arrangements promise to make it easier to switch lenders. However, the large banks will be better placed to absorb the costs of managing any new system."The Government accepted recommendations put forward by former Reserve Bank governor Bernie Fraser for a low-cost switching option. No one else has suggested that the switching system, which has been in place since July 1, is costly.The report also said the implementation of Basel III would weigh more heavily on small financial institutions. Yet, the Australian Prudential Regulation Authority has made it clear that small institutions will not bear the full brunt of the Basel III regulations.The main concern is that mutuals would be denied access to common equity tier one instruments under Basel III and would be limited to retained earnings for their regulatory capital.The report said Government initiatives to expand the operations of the retail corporate bond market would have limited benefit for mutuals because most of them are not listed and do not have credit ratings.However, the mutual does not have to be listed for the notes to be listed. Australian Unity, an unlisted mutual, has issued