The Australian Prudential Regulation Authority (APRA) will make changes to its banking framework to increase proportionality and reduce regulatory burden as part of the Council of Financial Regulators' (CFR) Review into Small and Medium-sized Banks.
The findings and recommendations of the Review, undertaken by the CFR1 and the Australian Competition and Consumer Commission, were released yesterday by the Treasurer.
As noted in the Treasurer's media release, the government welcomed all nine actions from regulators and has accepted in-principle eight of the recommendations from the review. Government will seek feedback on the final recommendation from the review, which would involve APRA introducing a lighter touch framework for very small banks, accompanied by adjustments to the Financial Claims Scheme. APRA looks forward to engaging with Government and industry on this.
The Review examined the role of small and medium-sized banks in providing competition, as well as trends and barriers impacting their ability to compete.
It found small and medium banks had increased their overall market share since the global financial crisis but faced competitive challenges due to the high fixed costs of running a bank and their smaller scale. The review found that there are material and on-going market-driven challenges, as banks of all size adjust to the impact of digitisation, changing customer preferences and the growing complexity of risks they need to manage.
The review concluded the regulatory regime governing these banks was broadly fit-for purpose and also identified several areas where regulations could be changed to contribute to the ability of these banks to compete.
Among the nine actions that the CFR agencies and ACCC have committed to are four that APRA will take to better support competition from small and medium banks.
ARPA will:
- formalise a three-tiered approach to proportionality in the regulatory framework for banking to broadly align with large banks (the majors), medium banks (other banks that are Significant Financial Institutions) and small banks;
- streamline, simplify and clarify the accreditation process that allows banks to use the internal-ratings based approach to calculating risk-weighted assets;
- better communicate to banks APRA's decisions on minimum capital requirements under Pillar 2 of the Basel framework2 and what risks need to be addressed for certain capital adjustments to be removed or lowered; and
- amend its bank licensing framework with the aim of making its expectations more transparent and the process more efficient. This decision was announced late last month.
The review also identified other actions that require cooperation across multiple regulators and legislative reform. APRA looks forward to working with government and peer regulators to take these forward collectively. As part of this, APRA will review whether covered bonds should qualify as high-quality liquid assets, taking into account planned changes to issuance limits.
Chair John Lonsdale said the review had been a valuable exercise in focusing regulators' attention on whether they were striking the right balance between consumer protection and considerations such as competition and efficiency.
"Small and medium-sized banks are an important part of the industry landscape, delivering essential banking services and providing choice for millions of customers, especially in rural and remote areas.
"We recognise the challenges many of these institutions face at a time when banking is becoming increasingly digitised, and community expectations around cyber security and operational risk management are rising.
"At a time of heightened global geopolitical uncertainty, robust regulation is vital to ensuring all banks remain safe, stable and treat their customers fairly. APRA is committed to efficient, right-sized regulation that supports safety, stability and good community outcomes while also supporting competition and innovation in the sector.
"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. APRA has also written to the Treasurer about further initiatives to support productivity, beyond those outlined above. I look forward to sharing more details on these initiatives in due course," Mr Lonsdale said.
The full report of the CFR Review is available at: Review into Small and Medium-sized Banks.
Footnotes
1The CFR comprises APRA, the Reserve Bank of Australia, the Australian Securities and Investments Commission and The Treasury.
2 Pillar 2 adjustments are made by APRA's supervisory teams to account for risks not covered, or not adequately covered, by the bank's core Pillar 1 minimum capital requirements and are typically not made public.
