Regulators and small business advocates want a $5 million threshold, banks are keen to limit it to $3 million. The issue is a key sticking point in talks between banks and corporate watchdog, as the industry tries to get the regulator's approval for a revised banking code of conduct.

While Mr Hirst did not think banks would tighten their lending to small businesses following the royal commission, some analysts and economists see this - alongside tighter mortgage lending -  as a real risk.

Capital economics chief economist Paul Dales said he thought the royal commission would lead to a "modest" tightening in bank lending. But in a more bleak scenario, he said tighter lending conditions could prevent businesses from hiring and investing.

"It's not the big businesses that are vulnerable as they can get funds from the capital markets. Instead it is the small to medium-sized businesses that will feel the brunt of it as they rely on bank funding to operate," Mr Dales said.

As smaller banks such as Bendigo have few larger corporate customers, they say they would be disproportionately affected by a $5 million threshold. Mr Hirst said such a change would increase the amount of loans that were "covenant-lite" - financial jargon for loans with fewer security conditions sought by banks.

About 10 per cent of Bendigo's business loan book, by value, are those between $3 million and $5 million.

If you’re going to be writing more risky business, you’ll be charging more and you’ll be doing less of it.

Bendigo's Mike Hirst

“Covenant-lite lending is riskier than more fully covenanted lending,” Mr Hirst said.

“And of course, banking is about managing risk. That doesn’t mean that you avoid risk, but it means that you charge appropriately for the risk that you take. So if I could speak in a generic sense across the industry. It wouldn’t be hard to draw the conclusion that if you’re going to be writing more risky business, you’ll be charging more and you’ll be doing less of it.”

Although the threshold for small business lending is still being figured out, the latest round of royal commissions did not recommend greater regulation in this part of the banking system.

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It did, however, question banks extensively over guarantor lending, and whether there were enough checks to make sure guarantors were aware of the risk they were taking.

Mr Hirst defended guarantor lending as "a big part of financing the economy.”

“At the end of the day, you’re kind of backing your kids to do well and do the right thing,” he said. “If you can’t do that, I don’t know who you can back.”