How will Australia's royal commission into the financial sector impact the banks?

Reputational issues and weakening investor confidence are amongst the expected effects.

Moody's Investors Service says that there are short-term negative as well as long-term positive implications for the banking sector in Australia of a Royal Commission into financial misconduct.

Moody's analysis is based on the Australian government's announcement of a Royal Commission into the conduct of the country's banks, insurers, financial services providers and superannuation funds.

"In the very short term, the commission could lead to negative reputational issues for the banks and result in some weakening of investor confidence, which could translate into higher wholesale bank funding costs," says Frank Mirenzi, a Moody's Vice President and Senior Credit Officer.

"Nevertheless, the banks will unlikely face a weakening in their access to wholesale funding markets, given their very strong credit profiles and strong regulatory oversight," adds Mirenzi.

Here's more from Moody's:

In the longer term, however, if the commission finds systemic cultural and operational failings, such conclusions could provide a platform for identifying remedial actions and solutions to the problems, which would improve governance, management and culture; a positive for the industry.

Moody's analysis is contained in its just-released report titled "Australian bank credit profiles remain robust despite Royal Commission," and is authored by Mirenzi.

Moody's continues to view Australian banks as being very well regulated, with a high degree of prudential oversight, and says that they are strongly capitalized relative to their balance sheet risks. At the same time, the entrenched industry structure underpins the banks' strong pricing power.

Moreover, Moody's says that the launch of the commission does not signal that government support for the banks is weakening. Moody's also expects limited potential for the commission to alter meaningfully the structure of Australia's banking sector, with such a situation supporting the banks' very strong profitability.