The five largest lenders in Australia will be pushed into a new prudential framework tier, as part of a proposed move by APRA to create proportionate regulation.
The Australian Prudential Regulation Authority (APRA) has begun consulting on adding a third tier to its prudential framework for banking, which would push the five largest lenders (the big four plus Macquarie Bank) into a new tier.
Currently, APRA works on a two-tier system for banking regulation: one for significant financial institutions (SFIs) and non-significant financial institutions.
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, as announced earlier this year, APRA is intending to move to a three-tiered model.
The regulator has now revealed that the new tier will be for “Most Significant Financial Institutions (MSFIs)” and will include banks that have more than $300 billion in assets.
This would currently comprise the four major banks:
- The Commonwealth Bank of Australia (CBA) - which has $1.34 trillion in total assets;
- Australia and New Zealand Bank (ANZ) - which has $1.22 trillion in total assets;
- Westpac - which has $1.13 trillion in total assets;
- National Australia Bank (NAB) - which has $1.10 trillion in total assets; and
- Macquarie Bank (which has $379 billion in total assets).
The second tier would cover all other banks that are SFIs, but the SFI threshold would be raised from $20 billion to $30 billion. This would mean that some banks could drop out of the middle-tier cohort.
For example, currently, AMP, Rabobank, People First Bank and Newcastle Greater Mutual Bank all have more than $20 billion under assets but less than $30 billion. If the threshold was raised, they would no longer fall in this category. Instead, they would be in the third tier (non-SFIs), leaving just ING Australia, Bendigo Bank, BOQ and HSBC in the new SFI threshold.
Indeed, the third tier – being non-SFIs – would include all remaining banks. APRA said it would give non-SFIs additional time to comply with new or revised requirements – where appropriate – compared to banks in the other tiers.
Given that banks may increase/decrease in size over time (for example, through mergers or divestments), APRA is also proposing 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.
The regulator said the move to create a more tiered approach would enable APRA to differentiate prudential requirements with “greater clarity” – including setting requirements that are not overly complex or burdensome, relative to what is needed to ensure the continued financial safety of smaller ADIs. It would also formalise elements of the existing framework that are already differentiated by more than two tiers and embed the approach more systematically across the framework.
APRA has said it also thinks a more differentiated framework should reduce regulatory impost on smaller ADIs, freeing up resources for investment in more productive areas.
APRA has now opened a three-month consultation on this proposal and said it expects to finalise the proposals in 2026.
However, APRA is also considering the possibility of creating a fourth tier, which would have eased requirements for “the very smallest banks”, as well as considering whether additional proportionality may be appropriate in superannuation and insurance. It is currently engaging with Treasury on these proposed additional tiers.
Speaking of the proposed changes, 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,” she said.
“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.
“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.”
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.
[Related: APRA to move to new regulatory framework for banks]
