APRA announces reforms to ease regulatory pressure on small and medium banks

The Australian Prudential Regulation Authority (APRA) has released a series of reforms to make its banking framework more proportionate and reduce compliance pressures on smaller institutions.  

This move towards more proportionate regulation is a welcome step to support a more competitive banking environment and foster innovation, benefiting not only the smaller banks but also the broader sector and communities they serve.  
 
These changes follow the Council of Financial Regulators’ Review into Small and Medium-sized Banks, undertaken with the Australian Competition and Consumer Commission (ACCC), and aim to support competition while maintaining stability, safety and community confidence. 

What’s changing 

Despite increased market share since the global financial crisis, smaller and mid-tier banks continue to face challenges from high fixed operating costs, limited scale, and the need to keep pace with digitisation and shifting customer expectations. As part of the review, the following actions have been identified: 

• Formalise a three-tiered prudential framework for banks. 
• Review and streamline internal ratings based (IRB) approach accreditation processes.  
• Review liquidity policy, including covered bonds and asset encumbrance limits. 
• Assess improvements to liquidity support for small banks.  
• Improve transparency in decisions on minimum capital requirements.  
• Reduce internal dispute resolution reporting frequency for smaller banks.  
• Review, with sufficient regularity, regulatory reporting requirements. 
• Improve licensing framework with clearer expectations and defined timeframes.  
• Support collaboration among small banks and provide guidance on exemptions. 

‌In response, APRA has committed to support four out of the nine key actions: 

• Formalise a three-tiered proportional regulatory model aligned to bank size: large banks (majors), medium banks (other Significant Financial Institutions), and small banks. 
• Simplify internal risk accreditation to make it easier for banks to gain approval to use internal ratings-based methods for calculating risk-weighted assets. 
• Improve transparency on capital requirements by providing clearer feedback on APRA’s Pillar 2 capital requirements and steps needed for adjustments to be removed or reduced. 
• Update the bank licensing framework to set out expectations more clearly and make approvals more efficient. 

These changes sit alongside broader recommendations that will require coordination between regulators and, in some cases, legislative change – such as reassessing the treatment of covered bonds as high-quality liquid assets. 

Impacts on small and medium-sized banks 

The reforms mark a shift towards regulation that better reflects a bank’s size and complexity. This could mean lower compliance costs, fit-for-purpose regulatory processes and greater flexibility in capital allocation and planning – therefore creating opportunities to compete more effectively.  
 
Banks will still need to monitor how the new framework is applied, particularly around tier classification, capital settings and supervisory expectations, to maximise the opportunities it presents. 

How we can help 

While the proposed changes will ease regulatory pressures for smaller and medium-sized banks, having the right framework and controls in place to navigate the new regulatory landscape is important to realise its benefits.  
 
We will continue to monitor regulatory developments and provide insights to help banks make the most of proportionality while managing potential risks. Our team can support you in assessing the implications for capital, licensing and compliance obligations, and to adapt your strategy to capture emerging opportunities. For tailored support, don’t hesitate to reach out. 

Article contributed to by Jamil Saripada - Audit & Assurance

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