iscover
The Council of Financial Regulators (CFR) released its Review into Small and Medium-sized Banks.
The report, in consultation with the Australian Competition and Consumer Commission (ACCC), examined the role and state of the small and medium-sized banking sector.
An analysis identified the impacts of regulatory and market trends on competitiveness and identified barriers to competition.
The CFR provided nine key actions aimed at mitigating burden and streamlining effectiveness:
Action 1: APRA will formalise a three-tiered approach to proportionality in its prudential framework for banks (and consider a fourth tier if appropriate safeguards are put in place).
Action 2: APRA will review its IRB accreditation process, making its expectations of applicants more transparent and introducing further flexibility, where appropriate. APRA will consider adjusting its processes to:
- Streamline the accreditation process.
- Further simplify staged accreditation expectations.
- Provide additional guidance to applicant banks, including on engagement models.
Action 3: APRA will improve its communications to banks on its decisions on minimum capital requirements, clearly explaining the basis for the decision, and what risks need to be addressed for certain capital adjustments to be removed or lowered.
Action 4: ASIC will reduce the reporting frequency of internal dispute resolution reporting requirements for small banks from six months to 12 months. The CFR noted that extending this proposal to other small Australian financial service licensees and credit licensees is outside of the review’s terms of reference. However, the government may wish to consider similar changes for other smaller licensees that are subject to the IDR reporting regime.
Action 5: APRA, ASIC, the Reserve Bank of Australia (RBA), and the ACCC will adopt ongoing processes to review regulatory reporting requirements within the scope of this review to ensure they remain fit for purpose.
Action 6: APRA will make changes to its licensing framework, with the aim of making its expectations more transparent and its processes more efficient. This includes introducing formally defined and explicit time frames for licensing assessments.
Action 7: The ACCC will communicate its openness to considering proposals involving collaboration between small banks, including:
- Being willing and open to having early discussions with small banks and/or relevant industry representatives about their proposals for collaboration and to help them understand whether an exemption may be available.
- Having discussions and providing clear guidance about small banks’ options and processes available under the Competition and Consumer Act 2010.
Action 8: As part of a broader future review of its liquidity policy, APRA will consider whether:
- Covered bonds should qualify as high-quality liquid assets under the liquidity coverage ratio.
- Total asset encumbrance limits should be introduced.
Action 9: CFR agencies will work with the industry to assess whether refinements could be made to improve operational arrangements for small banks’ access to private and public liquidity support. Any improvements to liquidity safeguards should be considered by APRA when setting requirements for small banks.
Regulators respond to changes
Both the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) acknowledged the actions made by the CFR.
Among the nine actions, there are four that APRA will implement to support competition among the small- to medium-sized banking sector:
- 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.
- 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.
ASIC also responded to the actions and said it will action on two:
- Reduce the frequency of internal dispute resolution (IDR) data reporting for small banks (from 6 months to 12 months).
- Adopt ongoing processes to review regulatory reporting requirements for small and medium-sized banks to ensure fitness for purpose.
APRA chair John Lonsdale said the review was important to ensuring efficiency in the small- to medium-sized banking sector.
“The changes we have committed to as part of this review 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 has also written to the Treasurer about further initiatives to support productivity, beyond those outlined above. I look forward to sharing more details on these initiatives in due course,” said Lonsdale.
