The Australian Prudential Regulation Authority (APRA) has begun consulting on adding a third tier to its prudential framework for banking to embed additional proportionality and drive competition in the industry.
As part of the Council of Financial Regulators' Review into Small and Medium-sized Banks, APRA committed to formalise a three-tiered approach to proportionality in the prudential framework for banking to better support competition from small and medium banks.
Under the existing framework, banks1 are classified as either significant or non-significant financial institutions. Significant financial institutions (SFIs) face additional or heightened requirements in some areas relative to non-SFIs.
In a discussion paper published today, APRA has proposed creating a new tier of Most Significant Financial Institutions (MSFIs) for banks with more than $300 billion in assets. This would currently comprise the four major banks and Macquarie Bank.
The second tier would cover all other banks that are SFIs, with the SFI threshold raised from $20 billion to $30 billion. The third tier, being non-SFIs, would include all remaining banks.
Non-SFIs would be given additional time to comply with new or revised requirements, where appropriate, compared to banks in the other tiers. APRA also recognises that banks move between tiers from time-to-time whether through growth or merger and acquisition. APRA therefore proposes to provide all banks a transition period of at least 12 months to comply with higher prudential settings should they move to a higher tier.
APRA Member Therese McCarthy Hockey said increasing proportionality in the banking framework would support growth, competition and sustainability in banking.
"While APRA's prudential framework is inherently proportionate, with larger, more complex entities subject to heightened requirements, there is an opportunity to give greater certainty and clarity to the industry and reduce impost where appropriate.
"By increasing the level of distinction in our prudential framework between banks of different size, scope and complexity, APRA can better ensure that requirements are not overly burdensome relative to what is needed to protect depositors and promote financial stability.
"This is one of a number of initiatives APRA is undertaking to enhance proportionality and reduce regulatory burden as part of our continued efforts to support the Government's drive to lift national productivity. We are also engaging with Treasury on the possibility of creating a fourth tier with reduced requirements for the very smallest banks and will consider whether additional proportionality may be appropriate in superannuation and insurance.
"APRA will continue to explore opportunities to more explicitly differentiate prudential requirements and implementation flexibility by tier when we develop a new standard or revise an existing one," she said.
After a three-month consultation period, APRA expects to finalise the proposals in 2026.
A discussion paper outlining the proposed changes is available on the APRA website at: A more proportionate banking prudential framework
Footnotes
1Also includes credit unions and building societies
