Regulator set to introduce changes aimed at supporting smaller banks
The Australian Prudential Regulation Authority (APRA) has announced a series of reforms intended to foster greater competition among Australia’s mid-tier and international banks.
Speaking at the Australian Banking Association’s (ABA) 2025 Conference, APRA chair John Lonsdale (pictured) outlined several planned changes. Among these is a move to a formal three-tiered approach to proportionality in the banking framework, which Lonsdale said would allow the regulator to introduce more nuance into their policy and supervision approach to banks, with greater differentiation between requirements for different bank business models.
“APRA will soon move towards having three tiers in banking, roughly corresponding to large banks (the majors), medium banks (other banks that are significant financial institutions or SFIs) and small banks (non-SFIs),” he said.
APRA also plans to simplify and clarify the accreditation process for banks seeking to use the internal-ratings based method for calculating risk-weighted assets. “We want to make our processes simpler and more transparent for banks to navigate,” Lonsdale said.
“Getting approval to use this approach requires significant investments of time and money by banks, but the benefit can be a slight reduction in capital requirements.”
In addition, the regulator will improve communication around decisions on minimum capital requirements. “We have committed to more clearly explaining the basis for these decisions and what risks need to be addressed for certain capital adjustments to be removed or lowered,” Lonsdale said.
“Feedback to the CFR Review indicated that a lack of understanding by banks around the reasons for Pillar 2 adjustments can make it difficult for them to address APRA’s concerns.”
APRA will also amend its bank licensing framework to enhance transparency and efficiency. “The final action APRA committed to is to amend our bank licensing framework, with the aim of making our expectations more transparent and the process more efficient,” Lonsdale said. “While we can’t control the flow of new applicants, we can make our processes as efficient as possible to give high-quality new entrants the best possible chance of success.
“Cumulatively, we believe these measures 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.”
According to Anna Bligh, ABA chief executive, the changes are expected to benefit customers by strengthening competition in the banking sector. “Today’s announcements from APRA will support Australia's mid-tier and international banks to offer more competitive services for customers,” she said.
“These commitments will not reduce consumer protections, they are about making sure our smaller banks can focus on delivering better products and services to their customers. Having strong small and medium-sized banks in Australia is important for competition and customer choice.
“Our industry thanks APRA and the Council of Financial Regulators for their engagement throughout the review into small and medium-sized banks. Banks stand ready to work with APRA to ensure these commitments are implemented effectively.”
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