Like Canada’s banks, Australia’s financial institutions have basically skated past the problems in the global system. The banking system is dominated by four institutions that are constrained by an unofficial government policy that prevents them from merging with one another.

There are no impediments to entry into the Australian banking system, but the government does hope to preserve domestic competition by limiting potential scale.

The policy is the subject of continuous debate, as the “Four Pillars” themselves argue that this ostensible state sanction also inhibits their ability to compete on a global scale. Other critics charge that the setup allows the four to collude on interest rates and engage in other anticompetitive behavior.

Staying local, however, has had the result of keeping the system quite healthy. In fact all four were ranked among Global Finance magazine’s “World’s Safest Banks” for 2010. That makes the quartet quite attractive from an investor point of view: Commonwealth Bank of Australia Ltd (ASX: CBA, OTC: CBAUF, ADR: CMWAY,), the largest with a market cap of AUD72.1 billion, Westpac Banking Corp (ASX: WBC, NYSE: WBK), the second-largest with a AUD58.4 billion market cap, Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY), No. 3 at AUD50.2 billion, and National Australia Bank Ltd (ASX: NAB, OTC: NAUBF, ADR: NABZY), No. 4 at AUD47.9 billion.

With fear of a European sovereign-debt contagion swirling, these banks have not surprisingly been some of the worst performers in the Australian market in recent months. And to be fair, even conditions in Australia have been less than optimal. But with finances conservative, avenues to growth in Asia open as ever, dividends well-covered and share prices suddenly a lot lower, the group is definitely on the bargain counter.

Our favorite is Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANZBY, ANEWF). The company’s primary competitive advantage is its domestic net funding surplus, which means it doesn’t have to absorb the additional operating costs that come with accessing wholesale funding markets. Australian retail and commercial banking is the group’s major operation, and it runs the largest domestic bank in New Zealand as well.

New Zealand’s economy, like Australia’s, is resource-focused. Kiwis enjoy one of the lowest unemployment rates in the world, with economic growth also forecast to remain among the strongest in the world going forward.

ANZ operates in 25 other countries around the world, including China, Vietnam and Indonesia. The group also provides financial services in the Middle East, Europe and the US.

The third-largest of Australia’s banks, ANZ–as it’s popularly known–is full bore into a “no frills” program of providing financial advice, selling “superannuation” and insurance products to retail customers via the telephone. The program has helped the bank boost its deposit funding over the last 12 months.

Housing remains a trouble spot for many banks. But ANZ’s loan growth has been roughly in line with consensus expectation of 5 percent.

Business loan growth has stalled a bit but bad loans are still just 32 basis points worth of loans. That may rise a bit in coming months, should overall economic conditions worsen. But ANZ tightened lending standards early in 2011, which should ensure against any real negative surprises.

Better international growth prospects than its peers and a similarly solid capital position make ANZ the best way to build wealth through Australia’s strong financial system. Buy Australia & New Zealand Banking Group, a charter member of the Australian Edge Portfolio Conservative Holdings, up to USD22 in the US or AUD22 on the ASX.