APRA to move to new regulatory framework for banks

Given the greater power that SFIs hold on the macro-economic stability, these larger institutions are subject to stricter requirements and more intense supervision.

However, APRA has now said it will move to a three-tiered structure to create a more nuanced and proportional regulatory framework with differentiated requirements for each tier, aiming to simplify compliance and foster competition among smaller and medium-sized banks.

Why the change?

The move comes following recent concerns raised by the Council of Financial Regulators (CFR) and the Australian Competition and Consumer Commission (ACCC) for its review of the small and medium-sized banking sectors.

This review, initiated by the Treasurer, focused on enhancing competition within the Australian banking sector. Specifically, it sought to understand how regulatory and market trends impact their competitiveness (given the dominance of large investor-owned banks and the failures of several new entrants) and identify potential changes to regulation and supervision to better balance financial safety, stability, and competition in the banking landscape.

While the final report has not yet been released by the Treasury, APRA chair John Lonsdale revealed at the Australian Banking Association Conference 2025 on Thursday (24 July) that the prudential regulator had identified that a three-tiered approach would help make the regulatory framework “simpler and more proportional without creating unacceptable risks”.

He explained: “APRA will soon move towards having three tiers in banking, roughly corresponding to large banks (the majors), medium banks (other banks that are SFIs) and small banks (non-SFIs).

“This change will allow us to introduce more nuance into our policy and supervision approach to banks, with greater differentiation between requirements for different bank business models.”

APRA said it would also amend the bank licensing framework, with the aim of making its 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.”

He revealed that it was moving to “streamline, simplify and clarify” its accreditation process that allows banks to use the internal ratings-based approach to calculating risk-weighted assets.

“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. While APRA has long argued that this benefit is not as large as some critics maintain, we want to make our processes simpler and more transparent for banks to navigate,” Lonsdale said.

The prudential regulator said it would also “better communicate” its decisions on minimum capital requirements under Pillar 2 of the Basel framework, after feedback to the CDR Review revealed a lack of understanding by banks around the reasons for Pillar 2 adjustments, which can make it difficult for them to address APRA’s concerns.

Lonsdale said: “As a result, 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.”

Reflecting on the actions taken, Lonsdale said: “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.”

APRA “resisting the urge to introduce requirements that are ‘nice to have’”

However, he told delegates at the ABA Conference that there were many other actions that were called for by industry stakeholders through the small bank review that the regulator has not agreed to.

“In essence, that’s because we believed these measures – for example, lowering minimum capital requirements – would undermine safety and stability and therefore create unacceptable risks,” he said.

The chair added that, as the prudential regulator, the primary consideration was always financial safety and stability. So, while APRA needed to be mindful about the impact of its work on competition and efficiency, it had to “resist the urge to introduce requirements that are ‘nice to have’ but not essential for financial stability”.

APRA’s upcoming Corporate Plan will reportedly outline further initiatives aimed at reducing regulatory burden “in areas where it’s safe to do so”.

Welcoming the changes, outgoing ABA CEO Anna Bligh said they would “support Australia’s mid-tier and international banks to offer more competitive services for customers.”

“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,” she said.

“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.”

During the ABA Conference 2025 on Thursday, the APRA chair also signalled its readiness to intervene with stricter lending limits if there is a resurgence in “risky” residential lending practices in a lower rate environment.

Lonsdale explained: “Lending standards are currently sound, but looking ahead, one concern is that in the event of lower interest rates we could begin to see a rise in riskier forms of residential lending, which is historically what often occurs when the financial risk cycle picks up.

“It’s important to be forward-looking and prepared for potential risks at future points in the financial cycle.

“With that in mind, we will soon begin discussions with entities around implementation aspects of our various macroprudential tools to manage lending risks, including limits on some riskier forms of lending.

“We want to ensure such tools can be activated in a timely manner if needed.”

[Related: APRA may bring in limits if ‘risky’ lending rises as rates ease]