At the heart of the original call for a "Son-of-Wallis" financial system inquiry, and former treasurer Joe Hockey's subsequent endorsement of this idea, was the desire to end or fully price the implicit taxpayer guarantees of banks that bequeath us the "too-big-to-fail" problem.
"One of the principal recommendations [of the Wallis inquiry] was that we should never guarantee any part of the financial system under any circumstance for fear of inducing "moral hazard" - the risk that you encourage dysfunctional 'heads bankers win, tails taxpayers lose' behaviours," Hockey said in 2010.
Yet the government's unprecedented efforts to cauterise the global financial crisis made it clear that "the four major banks are too big to fail", as Hockey bluntly put it. 
The Financial System Inquiry's final report agreed that "actions taken by governments in Australia and overseas . . . during the GFC have reinforced perceptions of an implicit guarantee" wherein "creditors believe that, if a bank were to fail, the government would step in to rescue the institution".
"Empirical studies have found that Australian [banks], especially the largest [banks], benefit from an implicit guarantee," the FSI continued. "This is also evident in the credit ratings of the major banks, which all receive a two-notch credit rating . . . due to expectations of government support."
The worry with implicit (or explicit) government guarantees is that they "introduce a range of damaging distortions", the FSI warned, including transferring "risk from private investors onto the government balance sheet", "providing a funding cost advantage for banks over other corporations", "giving large banks an advantage over smaller banks", "weakening the market discipline provided by creditors", and "creating moral hazard that encourages inefficiently high risk taking".
This begs the question: have the FSI, and countless new regulations since the GFC, eliminated TBTF banks? In its FSI response, Malcolm Turnbull's government left no doubt this was a theoretically desirable endgame: "the government agrees that steps should be taken to reduce any implicit government guarantee and the perception that some banks are TBTF".
The first TBTF mitigant the FSI proposed was ensuring Australian banks "have unquestionably strong capital ratios". The report argued that boosting the major banks' "going concern" common equity tier one (CET1) capital into the top quartile of internationally active peers would reduce the "probability of failure" by significantly improving their loss-absorbing buffers.
The FSI also advocated a complementary "backstop" of a minimum "leverage ratio" of up to 5 per cent, as it judged the majors' 4.5 per cent leverage ratios would have rendered them "insolvent" in a GFC-style shock. (A leverage ratio represents the dollar value of a bank's equity divided by the dollar value of its credit risk exposures.)

Nobody knows risk weights are correct
The issue with "risk-weighted" capital ratios is that nobody knows whether the risk weights, which are arbitrarily determined by regulators, are actually correct. As a result, investors place much more emphasis on non-manipulable leverage ratios in times of duress.
The disconnect between risk-weighted capital and non-risk-weighted leverage ratios is particularly acute for Australian banks that have funnelled most of their funding into lending against expensive housing (as opposed to business loans), which attracts the lowest risk-weights and enables them to carry higher leverage than many global competitors.
APRA and the banks have assumed that the risk of loss on home loans is much lower than business lending. But they cannot be certain, because Australia has not experienced a genuine housing correction over the circa 30-year period in which banks have data for stress-testing.
The limited utility of this information is exacerbated by the fact that Australia's residential debt-to-disposable-income ratio is now more than four times higher than it was in 1990. 
The FSI's second key recommendation to ameliorate TBTF was to make banks "maintain sufficient loss-absorbing and recapitalisation capacity to allow effective resolution with limited risk to taxpayer funds".
The emerging standard here is for the biggest banks to have total loss-absorbing capacity (TLAC) of 16 per cent of risk-weighted assets by around 2019, which the four majors should come close to satisfying simply through their efforts to boost equity capital.
A questionable post-GFC innovation has been the advent of hybrid securities and bail-in bonds that regulators can supposedly write off or convert into equity if a bank becomes "non-viable".
Last year Glenn Stevens remarked that while this might be an "appealing idea" it comes with "the caveat that . . . it has not successfully been done for a major institution to date".
In practice it will be difficult for APRA to unilaterally bail in hybrids or bonds, as this will radically increase the cost of funding for all banks - including safe ones - at the worst possible time and accelerate contagion (to say nothing of APRA formally admitting a supervisory failure).
The only bona fide answer to TBTF is permitting banks to be exposed to the same market disciplines other businesses face; that is, letting creditors take control of bad banks when they cannot repay their debts and, in extremis, replace them with better ones.
Creating new bail-in securities that allow regulators to supplant creditor rights and banks to skirt insolvency only entrenches their protected-species status.
Behind closed doors, Australian government officials privately concede there is no way they would let a bank go bust. Whereas before the GFC the taxpayer had never explicitly backed or guaranteed bank liabilities, today we do in droves.
Taxpayers insure the risk of loss on $750 billion of deposits for free while the RBA has created a globally unique emergency loan facility that has set aside $245 billion in loans the banks can tap during a liquidity (solvency) crisis at a total annual cost of just 2.4 per cent. Few, if any, parties would lend to banks in this situation, and certainly not at an interest rate of just 0.4 percentage points above the cash rate.
The FSI couldn't even muster the courage to force banks to pay for their taxpayer deposit insurance, despite the Council of Financial Regulators recommending they do so, and this being best practice overseas.

Taxpayer subsidies worth billions
The deposit guarantees and the RBA's bail-out facilities represent tremendous taxpayer subsidies worth billions of dollars annually that underline the unavoidable reality that these are government-backed businesses.
This is why the credit-rating agencies have not removed the majors' two-notch upgrades that reflect the presence of public support. (There is a chance they lose one notch that is offset by an uplift to their stand-alone credit profiles as their leverage decreases.)
This presages three final insights. The first is that APRA is right to focus on ensuring the banks never face the spectre of insolvency in the first place by maximising their going-concern equity capital to "unquestionably" strong levels on a risk-weighted and non-risk-weighted basis. 
The second is Joe Hockey's 2010 call for a "social compact between our taxpayer-guaranteed banks, their shareholders, and government".
The message is that banks and their investors should accept more modest returns, and a narrower scope of commercial activities, in exchange for the profound public help they receive.
Yet since the big bank bosses continue to cling to their world-beating return targets and high dividend payout ratios, and are trying to shift the entire cost of additional capital on to customers, they evidently have no intention of buying into this bargain. You should expect nothing less from rational, profit-maximising oligopolists. 
The final point is that as APRA implements the FSI's recommendation to remove the major banks' large leverage advantages over rivals, we should expect smaller banks to start stealing home-loan market share.
This competitive incentive has been accentuated by the majors widening net interest margins through their brazen unilateral rate hikes.
Ultimately, taxpayers will be hoping that the system's current reliance on the "big four" is eventually superseded by a "middle-weight eight".