APRA sees renewed interest in ADI licensing

In his speech to the 2021 AFR Banking Summit, Australian Prudential Regulation Authority (APRA) chair Wayne Byres noted concerns around the demise of the neobank model following the recent exit of Xinja, as well as 86 400’s decision to seek to merge with National Australia Bank (NAB).

He also noted that APRA’s introduction of the restricted authorised deposit-taking institution (ADI) licensing pathway in 2018 was designed to foster competition by making it easier for new entrants to “navigate” the licensing process.

However, commenting on concerns around the neobank model, Mr Byres said: “With apologies to Mark Twain, let me suggest their death has been greatly exaggerated.

“With the resumption of licensing at the start of this month, we are now considering upwards of a dozen applications from aspiring ADIs. These applications cover both the direct and restricted ADI pathways, and many incorporate innovative technologies and business models.”

While warning that not all aspiring ADIs would be licensed, Mr Byres said that there “is no lack of interest”.

APRA resumed issuing new licences in phases in August last year after temporarily suspending the issuance of new licences in April 2020.

It said it had temporarily halted issuing licences due to the “significant challenges new entrants would have faced due to economic uncertainty” posed by the COVID-19 crisis.

Xinja case a ‘successful failure’

In his speech at the summit, Mr Byres cited Xinja’s case as a “handy illustration” of successful resolution.

“When it became clear the bank’s trajectory was unsustainable, APRA worked closely with the Xinja board to resolve the bank by returning deposits in full and in a timely and orderly manner, ensuring that no depositor lost money and there was no contagion to other parts of the system,” Mr Byres said.

“From my perspective, it was a successful failure.”

APRA recently revoked Xinja Bank’s ADI licence after noting that Xinja became the first Australian bank to complete a return of customer deposits and a transfer of the remaining tail of deposits to NAB.

This followed the shock announcement last year that it planned to relinquish its ADI licence and return all funds to depositors.

Meanwhile, the Australian Competition and Consumer Commission (ACCC) announced yesterday (30 March) that it will not oppose the proposed acquisition of 86 400 by NAB.

This followed the announcement in January this year that NAB would increase its 18 per cent shareholding in 86 400 Holdings Ltd to 100 per cent for a total consideration of around $220 million.

After receiving clearance from the competition watchdog, the transaction, which was subject to approval by shareholders and regulators, is now set to complete by mid-calendar year 2021.

Completion of the transaction is still subject to certain conditions, including further regulatory approvals from APRA, and approval of the scheme by the Federal Court.  

COVID-19 crisis shows need for contingencies

Mr Byres also said in his speech that the COVID-19 crisis has served as a reminder that financial institutions must be prepared for all sorts of contingencies, including severe shocks from unexpected quarters.

Explaining further, Mr Byres said that from a prudential perspective, contingency plans should begin with banks developing their own plans to guide their recovery from a severe financial stress event.

“Institutions have come a long way over the last few years in their recovery planning, although not all plans are yet as credible and ready to use as we would like,” he said.

Mr Byres warned, however, that implementing well-developed plans may not always be sufficient.

“So, contingency planning for APRA also includes preparation for the possibility that a bank’s recovery actions are unsuccessful, and we have to engineer an orderly exit from the industry.

“In regulatory jargon, this is termed resolution planning, and the effective resolution of problem banks is vital to ensuring their failure produces minimal disruption to critical services, and doesn’t threaten financial system stability.”

My Byres also commented on its recent revision of its licensing framework in a bid to place greater emphasis on longer-term sustainability of an ADI rather than the “short-term goal of obtaining a licence”.

He elaborated: “Our objective is not to make obtaining a banking licence harder. Rather, we want to improve the prospects of those who enter the market: after all, there is little competitive benefit if new entrants quickly fall by the wayside.

“Adding explicit requirements such as the need to have an income-generating product are hardly onerous expectations. But hopefully they will help sharpen up prospective entrants’ plans, and give greater comfort to everyone involved that a new entrant can add to the competitive dynamics of the industry.”

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