* Australian PM seeking support of smaller parties, independents
* Desire for bank inquiry rare common ground for new lawmakers
* Australia's' Big Four banks dominant, profitable, unpopular
By Jonathan Barrett and Matt Siegel
SYDNEY, July 7 (Reuters) - Australia's Big Four banks look set to face tough new scrutiny in the wake of the country's knife-edge election as a disparate group of lawmakers push for a wide-ranging inquiry into mis-selling, misconduct and market dominance concerns.
Commonwealth Bank of Australia CBA.AX , Westpac Banking Corp WBC.AX , Australia and New Zealand Banking Group ANZ.AX and National Australia Bank NAB.AX control 80 percent of the country's lending and could face calls to be broken up if independent and small party lawmakers succeed in their push for a Royal Commission into the industry.
Prime Minister Malcolm Turnbull's centre-right coalition, which opposed the setting up of a Royal Commission, is ahead in the vote count after Saturday's cliff-hanger election but may not secure an outright majority.
Turnbull has been a handful of lawmakers to form a minority government if needed, and is likely to have to make concessions to win their support.
The anticipated Royal Commission is supported by everyone from far right politician Pauline Hanson to the centrist Nick Xenophon and leftist Greens, who collectively could hold the balance of power.
Rod Culleton, who may win a senate seat for Hanson's One Nation party, is one vocal advocate for an inquiry into the oligopoly.
"We have been able to put the banks in the holding yard, our branding iron is very hot in the forge and it's got the two symbols, RC, on it," said Culleton, referring both to his own initials and to a Royal Commission.
PROFITABLE, UNPOPULAR
The Big Four banks are among the world's most valuable and most profitable. They have racked up strong earnings for over a decade thanks in part to regulations that have helped shielded them from non-bank lenders, overseas bank rivals and financial technology disruptors. series of scandals that saw bank clients being unwittingly sold high-risk investments and traders allegedly manipulating benchmark interest rates has made them deeply unpopular and an easy target for populist politicians whose views vary widely on other issues such as immigration and trade.
On Thursday, Turnbull's coalition was still short of the 76 seats needed for a majority, with a final outcome expected within days.
"I think it would be hard for Malcolm to agree to (a Royal Commission) but no ask is too big, nothing is off the table," said one coalition senator, who declined to be named.
While the scope of any potential inquiry into the banks is likely to be hammered out in negotiations, policies smaller parties campaigned on include imposing a tax on the major lenders, allowing customers to switch banks more easily and increasing the capital the big banks must hold.
Analysts estimate the banking sector already requires a further boost to their finances after raising a record A$20 billion ($15 billion) in fresh equity in 2015 to meet regulatory standards.
Morgan Stanley (NYSE:MS) this week forecast the four major banks will need at least another A$17.5 billion in capital, creating a drag on profits.
Raising additional capital could be more difficult for the banks after Standard & Poor's cut its credit rating outlook for all four major banks to negative from stable after a similar cut to Australia's sovereign rating outlook. at the four main lenders declined Reuters' requests for comment for this story.
Australian Bankers' Association chief executive Steven Münchenberg said misconduct and mis-selling issues were already being dealt with and that an inquiry organised by such disparate political groups could destablise the industry.
"It would be a grab bag of different interests. I suspect the only way they would be able to agree is if they put everything in," Münchenberg said.
"We think that's a dangerous path to go down."
Even if the coalition was to form government without ordering an inquiry, the parliament's next Senate will be dominated by those who do want one.
"I think it's important that we ensure that there isn't a repeat of the financial scandals that have left many thousands of Australians financially devastated," Independent Senator Nick Xenophon told Reuters.
Independent Bob Katter, who said on Thursday he would support Turnbull's coalition, has focused on what he has called predatory lending practices in rural areas. He has called for the government to take over bad debts from banks at a reduced sum, and then loan the money back to farmers at the central bank interest rate.
Bank shares have been under pressure this week, down 2-4 percent, underperforming the broader market following Saturday's uncertain election result.
Morningstar analyst David Ellis said the inconclusive election results and threat of a royal commission had weighed on bank shares.
"The independents and minority government may not be in the best interest of the economy and the banks," Ellis said. ($1 = 1.3323 Australian dollars)