Smaller banks, and in particular mutual banks and credit unions, may soon benefit from a degree of lighter touch prudential supervision, something they have long sought.
APRA chief John Lonsdale yesterday provided a preview of some elements of the
Council of Financial and ACCC’s review of small and medium banks.
“While the Treasurer will release the findings of the report in due course, I can confirm that APRA identified a number of areas where we believe we can make our framework simpler and more proportional without creating unacceptable risks – and I would like to outline those today” Lonsdale told the Australian Banking Association conference in Sydney.
APRA’s first commitment, he said “is to formalise a three-tiered approach to proportionality in the framework for banking.
“At the moment, we essentially have two tiers: significant financial institutions (SFIs) and non-significant financial institutions, with SFIs subject to stricter requirements and more intense supervision.”
APRA will soon move towards having three tiers in banking, roughly corresponding to large banks (the majors), medium banks (the very few other banks that are SFIs) and small banks (non-SFIs).
“This change will allow us to introduce more nuance into our policy and supervision approach to banks, with greater differentiation between requirements for different bank business models” Lonsdale said.
“Commitment two is to streamline, simplify and clarify our accreditation process that allows banks to use the internal-ratings based approach to calculating risk-weighted assets. Getting approval to use this approach requires significant investments of time and money by banks, but the benefit can be a slight reduction in capital requirements. While APRA has long argued that this benefit is not as large as some critics maintain, we want to make our processes simpler and more transparent for banks to navigate.
“Our third commitment is to better communicate to banks our decisions on minimum capital requirements under Pillar 2 of the Basel framework.
“Feedback to the CFR Review indicated that a lack of understanding by banks around the reasons for Pillar 2 adjustments can make it difficult for them to address APRA’s concerns. As a result, we have committed to more clearly explaining the basis for these decisions and what risks need to be addressed for certain capital adjustments to be removed or lowered.”
Smaller banks won’t want to revel too much in these reforms.
APRA remains acutely aware that a number of smaller banks rank above most others on their risk register.
This can be due to unease over strategy, management, operational risks, or apprehension around dodgy audits, or all four.