A senior Treasury official has played down claims Australia's big banks are too profitable due to their dominant position in the home loan market.

After a recent report found the big four were the most profitable in the developed world, the executive director of Treasury's markets group, Jim Murphy, today said bank profits were similar to those of other companies.

Mr Murphy also told a Senate inquiry there was healthy competition between big lenders, although a "transition period" in the financial sector had increased market concentration.

Asked if the banks were too profitable, Mr Murphy said net interest margins – a gauge of profitability on home loans – were "around long term averages".

"Their profit levels are no greater than over a long period of time than other major corporates," Mr Murphy said in Canberra.

"That's a matter for the community and the government to decide whether that's too high a profit, or OK."

Mr Murphy's comparison between banks and other companies did not take into account mining companies, which have enjoyed an earnings bonanza thanks to high commodity prices.

His comments come after the Bank for International Settlements said in June that the big four's ratio of profits to assets – at 1.19 per cent – was the highest in the developed world. Big banks profits hit $12 billion in the first half of the 2012 financial year, but earnings are expected to come under pressure from weak credit growth.

The inquiry is taking place amid ongoing political heat on banks for their refusal to pass on recent official cuts in interest rates in full.

Mr Murphy said that since the government's move to boost banking competition in late 2010, big lenders had lost $16.6 billion in lending business to smaller rivals. Lenders outside the big four had also enjoyed much faster growth in market share.

While Mr Murphy said there was increased market concentration compared with before the global financial crisis, he said this was due to fundamental changes in the financial system. Higher credit costs, for instance, were forcing smaller competitors to rethink their role in the market.

At the same time, he said the financial system had proven to be resilient, and was acting as a model for the rest of the world.

"I think that sometimes a lot of people seem to ignore the fact that we are in this transition period and that they are looking back pre-GFC," he said.

"In my view we are not going to return to a pre-GFC model for a financial system."

cyeates@smh.com.au