Customers should move their money to smaller banks if the big five banks slugged them to compensate for a new federal government levy, Malcolm Turnbull says.
The major bank levy, announced in Tuesday's budget, is set to raise $6.2 billion over the next four years to help balance the books.
However the banks are fighting back, saying the levy can't be absorbed and will need to be passed on to customers and shareholders.
The prime minister insisted the consumer and competition watchdog will be monitoring the banks to ensure a more competitive environment.
"If people feel that Westpac or the Commonwealth Bank is charging them too much, they can take their business somewhere else," he told the Seven Network on Friday.
Asked what would happen if all customers took their business to credit unions or smaller institutions, Mr Turnbull said: "You shouldn't run up the white flag and surrender to the banks."
"They are the most profitable banks in the world."
Commonwealth Bank CEO Ian Narev described the levy on liabilities as policy concocted on the run.
He says the banking giants have more questions than answers following a meeting with Treasury officials in Sydney on Thursday.
"This will test well in the opinion polls," he predicted on ABC radio.
"The question we should be asking as the public is, if a government is going to judge its success as an economic budget on the next day's opinion polls, is that the kind of economic policy we want."
Finance Minister Mathias Cormann said the banks received a straightforward explanation on the levy and there was nothing complicated about its details.
"Don't believe everything that someone who doesn't want to pay more tax is telling you," he said.
Labor will support the levy, but insists voters still want a royal commission into the banks.
Meanwhile, crossbench senator Nick Xenophon said the levy did not go far enough.
He will move amendments to extend it to three other foreign banks operating in Australia - ING, BNP Paribas and HSBC.
"It would be a perverse situation if foreign banks operating in Australia were to be given some form of preferred status over local banks," Senator Xenophon said.
He said the money from the extended levy should be put into a "last resort compensation scheme" for Australian investors who have lost money as a result of irresponsible financial advice.
