The Council of Financial Regulators (CFR), in consultation with the Australian Competition and Consumer Commission (ACCC), has released its report of its review of small and medium-sized bank competition.

The Review examined:

• the role and state of the small and medium-sized banking sectors in providing competition;
• the regulatory and market trends affecting their competitiveness;
• current and potential sources of and barriers to competition from these sectors.

The CFR makes 9 recommendations for the Government and sets out 9 actions for agencies involved in the Review.

APRA’s response

The Australian Prudential Regulation Authority (APRA) says it will make changes to its banking framework to increase proportionality and reduce regulatory burden as part of the Council of Financial Regulators’ (CFR) Review into Small and Medium-sized Banks.

The final recommendation from the review would involve APRA introducing a lighter touch framework for very small banks, accompanied by adjustments to the Financial Claims Scheme.

APRA will:

• formalise a three-tiered approach to proportionality in the regulatory framework for banking to broadly align with large banks (the majors), medium banks (other banks that are Significant Financial Institutions) and small banks;
• streamline, simplify and clarify the accreditation process that allows banks to use the internal-ratings based approach to calculating risk-weighted assets;
• better communicate to banks APRA’s decisions on minimum capital requirements under Pillar 2 of the Basel framework and what risks need to be addressed for certain capital adjustments to be removed or lowered; and
• amend its bank licensing framework with the aim of making its expectations more transparent and the process more efficient. This decision was announced late last month.

The review also identified other actions that require cooperation across multiple regulators and legislative reform.

As part of this, APRA will review whether covered bonds should qualify as high-quality liquid assets, taking into account planned changes to issuance limits.

Government response

The Treasurer announced that the Government accepts in‑principle eight recommendations and welcomes all nine actions from regulators.

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