Bendigo and Adelaide Bank chairman Robert Johanson yesterday warned that the litany of misconduct at the major banks could end up choking competition across the industry, with well-governed small institutions forced to swallow regulatory remedies intended to correct ills of market giants. In an exclusive interview with Banking Day, the veteran bank director said small deposit takers such as regional banks and credit unions could be facing a wave of new compliance obligations because the Hayne Royal Commission was not getting a full picture of how the banking industry operates."My concern is that the Royal Commission is about to opine on the ills of the banking system but the reality is that they are only dealing with the sick ward of the industry," he said."They need to get a broader view of the whole industry rather than delve through only the pathologies."I worry about what we at Bendigo might end up with from regulators in terms of any new rules meant to deal with issues such as NAB's mortgage introducer system."For more than a decade, Johanson has been a leading critic of Australia's regulatory capital rules that have permitted the four major banks to put aside less reserve cash for every loan they write than smaller institutions.While those rules continue to deliver lower lending costs to the big banks, Johanson said he was deeply worried that the whole industry will also be wearing the regulatory burden that will flow from wrongdoings and derelictions highlighted by the Royal Commission."That should not be allowed to happen," he said."What we don't want is the Royal Commission making recommendations that would squash financial providers into homogenous organisations."Johanson believes that small banks and other deposit takers are on the cusp of having to deal with existentialist threats from fintechs and other innovators and need to be given more flexibility from regulators to respond to strategic challenges.The problem is that governments and regulators have been driving banking reforms with a logic that makes it increasingly difficult for small deposit takers to differentiate their products and operating structures in the Australian marketplace.In some cases, the standardisation of banking supervision has produced extreme examples of "regulatory overkill" such as the imposition of the Bank Executive Accountability Regime (BEAR) on provincial credit unions."When we talk about the need for competition, part of the issue is the need for institutions to be allowed to be different," Johanson said."But the impact of regulation has been to manage us down to an average and thereby constrain business creativity and innovation."Eventually, we will end up with rules that will simply work against the choices banking customers wish to make."One of the biggest challenges for banks, according to the Bendigo chairman, is their collective imperative to retrieve segments of the lending market from which they have been disintermediated.Johanson believes banks are becoming increasingly "useless" as providers of credit to business customers and are struggling to compete against alternative capital sources such as the corporate debt market and online arrangers."Banks are not that useful for