The announcement of a banking royal commission has shaken Australia's financial sector and could land the big banks with a bill of up to $100 million each.
Shares in Commonwealth Bank, Westpac, National Australia Bank, ANZ and Macquarie tumbled on Thursday as investors took fright at news the big lenders had, after months of resistance, told Treasurer Scott Morrison of the terms under which they would reluctantly accept a commission.
While NAB and Westpac recovered from their early losses, CBA shares ended Thursday 1.9 per cent lower for their worst trading day since early August, when AUSTRAC launched Federal Court proceedings over allegations it breached laws combating money laundering and terrorism financing.
There could be more financial blows to come for investors, with UBS analyst Jon Mott suggesting each bank will cop a bill of between $50 million and $100 million for the commission.
"The royal commission is likely to be expensive and distracting," Mr Mott wrote.
Mr Mott said it was difficult to predict what the commission's final recommendations would be, but that it was in all political parties' interests for them to have a material impact.
But shareholders could foot the bill for any changes banks are forced to make.
"In the past, the banks have used mortgage repricing to offset regulatory headwinds (higher capital, macro prudential and bank levy)," Mr Mott said.
"We think this will become more challenging in a post royal commission environment."
The ASX financial sector dropped almost two per cent in morning trade, led by the big four retail banks and Macquarie, after the chief executives and chairs of CBA, Westpac, NAB and ANZ co-signed a letter to Mr Morrison accepting the need for an inquiry.
Bargain hunters swooped later in the day and NAB ended the day one cent higher at $29.59 while Westpac finished just a cent lower at $31.47.
ANZ closed 1.1 per cent lower at $28.46, while Macquarie Bank was down 1.5 per cent at $98.23.
Shares in insurers also fell on news that the wide-ranging commission will also look at their industry, but smaller lenders bounced on the impression they have less to fear than their giant rivals.
The banks had long resisted calls by the federal Labor opposition, unions and some consumers for a wide-ranging royal commission but, with momentum for a parliamentary inquiry growing, finally caved in.
Westpac chief executive Brian Hartzer followed up the co-signed letter to the Treasurer with a separate statement in which he expanded on the banks' about turn.
"While Westpac has consistently argued and continues to believe that a royal commission is not necessary, in the current circumstances it is now more important that the financial sector can continue to operate effectively and with certainty," Mr Hartzer wrote.
"As a result, we have concluded that it is in the sector's and Australia's interests that a properly constituted royal commission is established to finally end the political distractions."
The insurance industry said it was already reviewing the draft terms of reference.
Insurance Council of Australia chief executive Rob Whelan said government-initiated inquiries had found no systemic issues in the general insurance industry that needed addressing.
"The general insurance industry is one of the most heavily regulated and scrutinised sectors of the Australian economy, with strong consumer protections," Mr Whelan said.