Large banks have considerable pricing power in the mortgage market and should be "taxed" in some fashion to level the playing field, four regional banks argue in a submission to the Financial System Inquiry. Pegasus Economics wrote the submission for four "Australian-owned regional banks", as they have parochially styled themselves. They are Bendigo and Adelaide Bank, BOQ, ME Bank and Suncorp Bank.In an effort to illustrate the advantage large banks have, Pegasus argued the four major banks would need an additional A$27 billion in capital if they provided as much capital to back home loans as smaller banks do.This estimate assumes the four banks would need to raise this capital "if they faced a 40 per cent risk-weight for residential mortgages, roughly the percentage that regional banks confront."The four banks focus their submission on issues of industry structure. This is a topic on which the inquiry receives no encouragement to dwell in its terms of reference.Pegasus raises and analyses the question of whether banking in Australia is an oligopoly, but never answers it.Profit levels, rates of return and market concentration are all discussed, but no conclusion drawn.The four banks' submission thus drifts into a rationale for fiddling with regulatory settings in a manner that suits their business model.The four recommend that the inquiry "examine the lowest-cost means of removing the funding advantage of the 'too big to fail' problem."It lists five real solutions: A levy, or tax, on big banks "to the value of the implied benefit"; letting small banks pay for a government guarantee; higher capital charges and other contingent capital instruments and divestiture.A sixth option is to police the perception that "the Government would not let any bank to fail.""The Government could consider making clearer its likely actions in the case of any bank failure to ensure there is not a disproportionate impact on funding costs," they say.