A Royal Commission into Australia's banking sector will be launched after the Big Four themselves called for a "properly constituted inquiry".
In a major backflip this morning, Malcolm Turnbull announced the A$75 million ($82.9m) inquiry saying speculation about the commission was moving into "dangerous territory" that was putting the banking sector and the Australian economy at risk.
"The speculation about an inquiry cannot go on," Prime Minister Turnbull told reporters in Canberra.
"It's moving into dangerous territory where some of the proposals being put forward have the potential, seriously, to damage some of our most important institutions.
"We have got to stop the banks and our financial services sector being used as a political football."
Turnbull's announcement comes after the chief executives of the Commonwealth, Westpac, National Australia and ANZ banks requested the government step in and launch an inquiry in an email sent to Treasurer Scott Morrison yesterday.
The letter was released by each bank in an ASX release this morning.
"It is now in the national interest for the political uncertainty to end," the chief executives said.
"It is hurting confidence in our financial services system, including in offshore markets, and has diminished trust and respect for our sector and people. It also risks undermining the critical perception that our banks are unquestionably strong."
Turnbull's announcement comes just two days after he again ruled out a Royal Commission.
"We have made it clear that we are not going to establish a Royal Commission and the reason for that is simply because we want to get on with the job now," he told reporters in Sydney on Tuesday.
"If we had set up a Royal Commission into banks two years ago, none of the reforms that we have undertaken would have been able to be achieved."
His announcement today scuppers the threat of an imminent internal revolt from National's senators, who were planning to launch a bid in Parliament for a Royal Commission with support from Labor and the Greens today.
Nationals Senator Barry O'Sullivan last night secured support from the Greens for the move, and earlier this week secured assurances from government backbenchers in the lower house that they were willing to cross the floor to launch the commission.
The Nationals' move aimed to take advantage of the government's reduced numbers in the lower house, with Barnaby Joyce and John Alexander out fighting by-elections after citizenship issues.
Turnbull told reporters in Canberra today it was a "relevant fact" that the government was two members down in the House of Representatives.
Senator O'Sullivan indicated support for the Prime Minister's move this morning.
"I think we've got a prime minister who has listened and had the capacity to make and support a decision, and I think that's a positive thing," he told reporters in Canberra.
The Senator denied pressure from the Nationals had prompted the announcement.
"It wasn't the private members bill that dragged the Prime Minister to the table," he said.
"He was making his own journey in relation to these matters."
'Regrettable but necessary'
Treasurer Scott Morrison has dubbed the Royal Commission a "regrettable but necessary action".
Government reforms to strengthen oversight and penalties in the banking sector undertaken in the past year would not have been possible if a Royal Commission had been launched earlier, Morrison said in a joint press conference with the Prime Minister at Parliament House.
"All these reforms and actions would not have occurred had the government agreed to undertake this action earlier, such actions would have been unnecessarily delayed," he said.
"Nor would such action prior to this time have been in the national economic interest.
"But the nature of political events means the national economic interest is now served by taking what I describe as a regrettable but necessary action."
Morrison said he had consulted with Treasury, the governor of the Reserve Bank of Australia and the chair of APRA.
They agreed it was a "regrettable but necessary course of action" to take control "given the uncertainty, disruption, and damage being done by political events".
Quick 'comprehensive' inquiry
Turnbull has given the Royal Commission just 12 months to report back to government.
It will be required to report back by February 1, 2019.
"This should not be a commission that runs forever, costing many hundreds of millions of dollars, as would've been the case under some of the proposals," Turnbull said.
"The terms of reference will ensure a responsible but comprehensive investigation into how financial institutions have dealt with cases of misconduct in the past, and whether those examples expose issues in terms of the cultural and governance issues in terms of the regulation and supervision of the industry.
"It will cover the nation's banks, big and small, wealth managers, superannuation providers, insurance companies.
"It will be a comprehensive inquiry."
Turnbull made the decision after meeting with Cabinet this morning.
After receiving the letter from the Big Four banks asking the government to step in, the leadership team determined the only way the government could give "all Australians a greater degree of assurance" was a Royal Commission into misconduct into the financial services industry.
The Royal Commision will not test individual cases of Australians who had fallen victim to bank misconduct.
"I want to make this very clear, a royal commission will not be able to recommend comprehension for individual cases, but it will be able to make recommendations the government consider in the interests of making our financial system the most competitive, transparent and accountability in the world," Turnbull said.
"We have much to be proud of about our banking system and the experience of the Global Financial Crisis should remind us of that," Turnbull said.
"We have much to be proud of, but also much to take care of.
"We need to maintain the stability of our banking and financial system, all Australians, consumers, small businesses, farmers, shareholders, must have confidence and trust in the financial system.
"Now this Royal Commission's establishment will end the uncertainty and speculation, it will conduct an inquiry into a thorough and conventional fashion, and so doing, it will protect the integrity of our banks, thereby ensuring Australians' trust in this critical issue is well funded."
Big banks call for inquiry
Australia's major banks earlier called on the federal government to set up a "properly constituted inquiry" into the financial services sector.
The CEOs of the Commonwealth, Westpac, National Australia and ANZ banks made the request in an email sent to Treasurer Scott Morrison yesterday.
The letter was released by each bank in an ASX release this morning.
The banks believe a Royal Commission is not needed.
"Our banks have consistently argued the view that further inquiries into the sector, including a Royal Commission, are unwarranted," the letter continued.
"They are costly and unnecessary distractions at a time when the finance sector faces significant challenges and disruption from technology and growing global macroeconomic uncertainty.
"However, it is now in the national interest for the political uncertainty to end.
"It is hurting confidence in our financial services system, including in offshore markets, and has diminished trust and respect for our sector and people.
"It also risks undermining the critical perception that our banks are unquestionably strong."
The chief executives said their banks had acknowledged that "we have not always got it right, and have made mistakes".
"Together with the Government and regulators, since 2014 we have been taking action to fix issues, and improve what we do and how we do it," they said.
"We have collectively appeared before, or taken part in 51 substantial reviews, investigations and inquiries since the global financial crisis, 12 of which are ongoing.
"We continue to demonstrate our commitment to doing the right thing by our customers and seeking to ensure those genuinely affected by these mistakes are appropriately compensated."
Australians 'right to be cynical'
Labor leader Bill Shorten has condemned the announcement as "one of Malcolm Turnbull's greatest failures of leadership".
Despite the prime minister establishing the inquiry the Labor Party has spent almost two years calling for, Shorten has raised serious concerns about the way the investigation will be conducted.
"Australians have every right to be cynical about today's announcement," Shorten said in a joint statement with Shadow Treasurer Chris Bowen and Shadow Financial Services Minister Katy Gallagher.
"Malcolm Turnbull has spent 601 days fighting Labor's call for a Royal Commission into the Banking and Financial Sector," he said.
"It says everything about Turnbull's values and priorities that he only agreed to Labor's Royal Commission when the banks told him he had to.
"He ignored the pleas of families and small businesses, he rejected the words of whistleblowers. But when the big banks wrote him a letter, he folded the same day."
The Opposition leader accused Turnbull of protecting the banks in an effort to keep his own job.
"That is unforgivable," he said.
"If Turnbull had have listened to Labor, we would've had a Royal Commission and it would have been done by now, with its recommendations being implemented.
"We are deeply concerned that even today, the Prime Minister said a Royal Commission was 'regrettable'.
Shorten said if the Commission was to be successful, Labor would need to be formally consulted.
"Failure not to consult will raise serious concerns and doubts about the way in which the Royal Commission is constituted, given that Malcolm Turnbull and Scott Morrison have spent the last 18 months doing everything to avoid one," he said.