'Capitalism not on trial,' says Australian PM as bank inquiry announced

The decision follows a series of scandals over money laundering and other abuses.

Mr Turnbull's conservative coalition has been resisting calls from the centre-left opposition Labour Party for such an inquiry for almost two years.

His stance changed after the chief executives of Australia's four largest banks wrote to the government on Thursday requesting a "properly constituted inquiry".

The banks said uncertainty was "hurting confidence" in the industry.

By establishing a royal commission Mr Turnbull has staved off a bid by Labour to have Parliament conduct its own inquiry into misconduct allegations.

"Ongoing speculation and fear-mongering about a banking inquiry or royal commission is disruptive and risks undermining the reputation of Australia's world-class financial system," he said in a statement.

"The government has decided to establish this royal commission to further ensure our financial system is working efficiently and effectively," he added.

But Mr Turnbull said the royal commission "will not put capitalism on trial."

The inquiry was welcomed by Jeff Morris, a financial planner who in 2013 exposed a culture of corruption and cover-up in the Commonwealth Bank of Australia, the nation's largest bank, that targeted vulnerable customers.

Mr Morris earlier had accused the government of "running a protection racket for the banks" by rejecting a recommendation for a royal commission inquiry into the Commonwealth Bank.

Josh Mennen, principal at Maurice Blackburn Lawyers, said the royal commission must be wide-ranging to end scandals and to bring about substantial reform.

He said the scandals reflected deeply ingrained problems that have financially ruined thousands of Australians.

AP