Ms Banks, who made the allegation in a memoir, said the male MP moved his hand up her leg during a parliamentary vote session before moving away.
Prime Minister Scott Morrison's office said in a statement they weren't previously aware of the allegation.
Behaviour of such kind was "completely inappropriate," they said.
In an excerpt from her memoir, Ms Banks did not identify the man, who she said was still in cabinet.
She said she and other government MPs had been waiting around for a night-time parliament vote, when the minister came and sat next to her and put his hand "just above my knee and edged slowly and deliberately to my inner thigh and then further up my leg".
"For a minister to do this in the prime minister's wing, which was full of Coalition [government] MPs, he had to be astoundingly brazen. I found it unbelievable."
Ms Banks' allegations have again highlighted the treatment of women in Mr Morrison's conservative government and wider Australian politics.
Separate allegations of rape - in Parliament House and against a senior government minister - prompted a wave of #MeToo protests across the country earlier this year.
Ms Banks has previously spoken out about sexism and misogyny in Australian politics.
The former MP sensationally quit the Liberal party in 2018, after then prime minister Malcolm Turnbull was deposed in a leadership coup which installed Scott Morrison.
In her exit speech at the time, she condemned the "bullying and intimidation" she had experienced in parliament.
Ms Banks, a former lawyer, said parliament was decades behind the corporate world in its attitudes towards women.
She has expanded on this "anti-women" culture in her book, Power Play: Breaking Through Bias, Barriers and Boys' Clubs.
In it, she also alleges that Mr Morrison tried to "bully" her after she announced her departure and tried to silence her. He was like "constant, menacing, background wallpaper", she said.
A spokesperson for the prime minister acknowledged Mr Morrison held several conversations with Ms Banks.