An explosive report has revealed fraud and number-fudging is rife in the banking system.

It says the sector is on a knife-edge, running up against the fallout of low standards and cooked books.

Prominent economists have made submissions to a Senate inquiry on white collar crime, detailing rampant dodgy practices they say undermine the financial system.

Economists Lindsay David and Philip Soos say banks systematically fudge the numbers on loan applications so that borrowers appear more creditworthy.

They also point to a dramatic lowering of lending standards as cause for a large looming housing bubble.

“The banks have trashed their lending standards over a prolonged period of time with significant evidence of banks massaging people's incomes in their loan application forms to make them look a lot more creditworthy than what they really are, which is essentially fraud,” Lindsay David of LF Economics has told reporters.

“The banks would do this for various reasons. One is the highly competitive environment between the banks. Second of all is profitability.

“The safer your mortgage book looks, the lower it costs you to do business — simple as that. If you show that your borrowers are very creditworthy then you are going to get cheaper funding costs, and that's a win-win for the bank — until the whole system breaks down, obviously.”

But experts say the practices could bring on an economic shock that exposes the decline in lending standards and damages confidence in international market.

They warn that this could block Australian banks from accessing the cheap offshore funds needed for lending.

“I don't think that Australians realise the risks the banks have taken in order to get house prices as high as they are,” Mr David said.

The warnings are based partly on data gathered by criminologist and consumer activist Denise Brailey, who has gone over more than 2,000 loan applications from aggrieved bank customers.

“We see incomes exaggerated, that's extremely common. We see signatures forged,” Ms Brailey, who runs the Banking and Finance Consumers Support Association, has told the ABC.

“In all cases,” she said, “[the loans are] unaffordable, unsustainable and unverified.”

“You've got [mortgage] brokers and lenders, who are remunerated on the number of loans they write, simply massaging the figures to put it through the computer system, and then it spits out an approval,” said Jeff Morris, the whistleblower who exposed the Commonwealth Bank financial planning scandal.

“The banks employ lenders who are bonused on the number of loans they write. They put them under enormous pressure to meet sales targets so if they don't meet their targets, they'll be sacked.”

The economists argue that it is bigger than just a few dodgy loan officers, but that the form of “control fraud” running right to the top of organisations.

They say bank bosses encourage the exaggerating of credit worthiness to secure cheap international funding.

Bank executives continue to deny any problem with loan quality or lending standards.

The economists say banks cannot have maintained their credit quality legitimately, given the huge jump in property prices relative to incomes.

The submission to the Senate inquiry will be released to the public next week.