APRA to review approach to new bank licensing

The Australian Prudential Regulation Authority (APRA) is looking to bring in "stronger requirements" for being granted a banking licence.

In an information paper published yesterday, APRA added it would also look to bring in closer supervision of new entrants as they attempt to establish themselves.

The revised approach has followed a review of APRA’s ADI licensing regime, which sought to incorporate learnings since the Restricted ADI Licensing Pathway launched in 2018 and follows the recent move by Xinja to return its banking licence.

The review, which was announced in August 2020, found that there needed to be greater focus on longer-term sustainability “rather than the short-term ambition of receiving a licence”, APRA said.

In the new paper, titled ADIs: New entrants – a pathway to sustainability, APRA outlined a number of changes, including:

• Requiring restricted ADIs to achieve a limited launch of both an income-generating asset product and a deposit product before being granted an ADI licence;
• More clarity around capital requirements at different stages for new entrants, aimed at curbing volatility in capital levels and facilitating a transition to the methodology for established ADIs over time; and
• An expectation for new entrants to have more advanced planning for a potential exit, including a focus on return of deposits as an option (which Xinja did recently, marking the first time an Australian ADI returned deposits to its customers).

In its paper, APRA said that its expectation in relation to all ADIs is that they maintain appropriate capital resources, both in terms of quality and quantity, in line with the risks to which they are exposed.

Furthermore, the prudential regulation said that new ADIs must “prudently consider potential challenges and ensure that they have sufficient capital to withstand these, including the possibility that profitability takes longer to achieve than expected”.

“The loss or delay of obtaining external capital support may result in the new ADI’s business model becoming distressed,” APRA said.

“Responsibility for the management of the new ADI’s capital position must be clearly defined as part of the ADI’s BEAR accountabilities. If APRA observes evidence of ineffective capital planning, supervisory intensity will increase, including consideration of whether further enforcement action is warranted.”

APRA has stipulated capital requirements for new ADIs in two parts. First, the applicant will be required to hold a minimum initial capital amount specified by APRA as a precondition to being granted an ADI licence, and immediately before that date.

Second, once an ADI obtains a licence, the initial capital amount would no longer apply, and would instead be replaced by an ongoing prudential capital requirement (PCR), plus buffers.

APRA has also detailed its expectations for a new ADI’s exit plan, stating that it must include a return of deposits option, even if that is one of several options.

“This option entails the entity repaying depositors from its own financial resources while remaining solvent throughout the depositor repayment period, and without reliance on the FCS (financial claims scheme),” APRA’s paper stated.

“Once all depositors are repaid, APRA would revoke the entity’s ADI licence, because it is no longer conducting banking business.”

According to APRA deputy chair John Lonsdale, the updated approach would support newly licensed banks “so they are better equipped to succeed”.

“Since launching the Restricted ADI regime three years ago, we’ve gained a deeper understanding of the challenges new and aspiring banks face as they try to establish themselves in an industry that is capital-intensive and dominated by some of the best resourced companies in Australia,” Mr Lonsdale said.

“This revised approach effectively targets key risks for new entrants, setting a higher bar for gaining a bank licence while enhancing competition by making it more likely new entrants can find their feet and gain a firm foothold in the market.

“New entrants will start from a stronger capital position and be ready to attract depositors and earn revenue immediately; they’ll receive additional supervisory attention from APRA until they’re firmly established, and – should they ultimately not succeed – they will be better placed to exit the industry in an orderly fashion.”

APRA is seeking feedback on the information paper, with the consultation period closing on 30 April.

[Related: APRA resumes issuing banking licences]