The Australian Prudential Regulation Authority (APRA) is set to implement significant changes to its banking framework aimed at enhancing proportionality and reducing regulatory burdens, following a comprehensive review of small and medium-sized banks. This initiative is part of the Council of Financial Regulators’ (CFR) exploration into the challenges these institutions face in maintaining competition within the banking sector.
The review’s findings and recommendations were publicly released yesterday by the Treasurer, who noted the government’s acceptance of nearly all the proposed actions. While eight of the nine recommendations have been accepted in principle, the government will seek public feedback on one recommendation that suggests introducing a lighter regulatory framework for very small banks. This would also come with modifications to the Financial Claims Scheme.
The review highlighted the increasing market share of small and medium-sized banks since the global financial crisis, but also noted the competitive hurdles they face, primarily due to high fixed operational costs and their relative scale. It explored how these banks are navigating the pressures of digitisation, evolving customer preferences, and a complex risk landscape.
Despite acknowledging that the current regulatory regime is broadly effective, the review pinpointed several areas for potential updates to enhance competitiveness among these banks. In response, APRA plans to take the following actions:
– Formalising a three-tiered regulatory approach that aligns with the varying needs of large, medium, and small banks.
– Streamlining the accreditation process for banks seeking to employ the internal-ratings based approach to risk-weighted assets.
– Improving communication regarding minimum capital requirements, helping banks understand APRA’s decisions under the Basel framework.
– Modifying its bank licensing framework to enhance transparency and efficiency.
The review further identified additional actions that would necessitate coordinated efforts across multiple regulators and legislative reforms. APRA looks forward to collaborating with the government and other regulatory bodies on these initiatives. This includes a review of whether covered bonds should be eligible as high-quality liquid assets, factoring in forthcoming changes to issuance limits.
Chair John Lonsdale remarked that the review was a crucial exercise in determining whether regulators are effectively balancing consumer protection with the needs of competition and operational efficiency. He emphasised the vital role that small and medium-sized banks play in providing essential services, particularly in rural and remote communities.
“At a time of heightened global geopolitical uncertainty, robust regulation is vital to ensuring all banks remain safe, stable and treat their customers fairly,” Lonsdale stated. “The changes we have committed to as part of this review strike a sensible balance between lowering the regulatory burden for banks while ensuring banks of all sizes have the financial and operational resilience to protect their depositors.”
The full report detailing the CFR Review is accessible online for public viewing.
