Australian Prudential Regulation Authority to formalise three-tier proportionality and streamline internal-ratings based accreditation for small and medium-sized banks

The Australian Prudential Regulation Authority (APRA) announced plans to change its banking prudential framework to increase proportionality and reduce regulatory burden, in response to the Council of Financial Regulators’ Review into Small and Medium-sized Banks released by the Treasurer on 6 August 2025. The government welcomed all nine regulator actions and accepted in-principle eight review recommendations, while seeking feedback on a further proposal for APRA to introduce a lighter-touch framework for very small banks alongside adjustments to the Financial Claims Scheme. APRA’s commitments include formalising a three-tier proportionality approach aligned to major banks, medium banks that are Significant Financial Institutions, and small banks; streamlining, simplifying and clarifying the accreditation process for banks seeking to use the internal-ratings based approach to calculate risk-weighted assets; and improving communication around APRA’s Pillar 2 minimum capital requirements, including what risks need to be addressed for certain capital adjustments to be removed or lowered. The package also includes amendments to APRA’s bank licensing framework to make expectations more transparent and the process more efficient, building on a decision announced in late July 2025. APRA will work with government and other regulators on actions that require cross-agency cooperation and legislative reform, including reviewing whether covered bonds should qualify as high-quality liquid assets in light of planned changes to issuance limits. It also flagged further productivity-related initiatives raised with the Treasurer, with more details to follow.