Australian Prudential Regulation Authority commits to three-tier proportionality, streamlined IRB accreditation and licensing changes for smaller banks

The Australian Prudential Regulation Authority (APRA) announced it will adjust its banking prudential framework to increase proportionality and reduce regulatory burden for small and medium-sized banks, following the Council of Financial Regulators (CFR) Review into Small and Medium-sized Banks. The package forms part of nine regulator actions in the review and is intended to better support competition while maintaining prudential safeguards. APRA’s commitments include formalising a three-tier proportionality approach across major banks, medium banks that are Significant Financial Institutions, and small banks; streamlining and clarifying the accreditation process for banks seeking to use the internal-ratings based (IRB) approach to calculate risk-weighted assets; improving communication on Pillar 2 minimum capital requirement decisions and the risk remediation needed for capital adjustments to be removed or lowered; and amending the bank licensing framework to make expectations more transparent and the process more efficient. Alongside cross-regulator and potential legislative work, APRA will also review whether covered bonds should qualify as high-quality liquid assets, taking into account planned changes to issuance limits. The government has accepted in-principle eight review recommendations and will seek feedback on a proposal for APRA to introduce a lighter-touch framework for very small banks alongside adjustments to the Financial Claims Scheme, with APRA indicating it will engage with government and industry. APRA also said it has written to the Treasurer on additional productivity initiatives and will provide further details later.