The Australian Prudential Regulation Authority (APRA) has begun consulting on a new three‑tier prudential framework for banks, a move designed to embed greater proportionality into regulation and help small and medium-sized lenders compete more effectively – including in the mortgage market.
The change delivers on APRA’s commitment under the Council of Financial Regulators’ (CFR) Review into Small and Medium‑sized Banks to “better support competition from small and medium banks” by formally tailoring requirements to size, risk profile and complexity.
Under the existing framework, authorised deposit‑taking institutions (ADIs) are classified as either significant financial institutions (SFIs) or non‑significant financial institutions (non‑SFIs), with SFIs facing additional or heightened requirements in some areas.
In a new discussion paper, APRA proposes a three‑tier structure:
APRA notes that a $300 billion threshold maps to roughly 5% of system assets, which it views as a reasonable marker of the most systemically significant institutions. Within the top tier, it would continue to designate the four majors as domestic systemically important banks (D‑SIBs).
Raising the SFI threshold to $30 billion reflects both inflation and banking system growth since the concept was introduced. Several current SFIs may fall below the new threshold on size alone; APRA says it will assess those ADIs case‑by‑case, considering factors like complexity and group structure to determine whether they should retain SFI status.
APRA is also proposing to formalise extra implementation time for smaller institutions.
Non‑SFIs would, where appropriate, be given longer to comply with new or revised prudential requirements, allowing them to learn from the experience of larger banks and spread implementation costs.
APRA has already applied this staggered approach in areas like CPS 511 Remuneration and parts of CPS 230 Operational Risk Management, but it has not been a default expectation.
In addition, APRA recognises that banks move between tiers over time through growth or merger and acquisition activity. It therefore proposes to provide all ADIs with a transition period of at least 12 months to comply with higher prudential settings if they cross into a higher tier, with discretion to grant more time in complex merger situations or for specific standards that require a major uplift in capability.
APRA member Therese McCarthy Hockey (pictured) said increasing proportionality in the banking framework would support growth, competition and sustainability in banking.
“While APRA’s prudential framework is inherently proportionate, with larger, more complex entities subject to heightened requirements, there is an opportunity to give greater certainty and clarity to the industry and reduce impost where appropriate," Hockey said.
“By increasing the level of distinction in our prudential framework between banks of different size, scope, and complexity, APRA can better ensure that requirements are not overly burdensome relative to what is needed to protect depositors and promote financial stability.
She said the three‑tier proposal is one of several initiatives the regulator is pursuing to enhance proportionality and cut regulatory burden in support of the government’s productivity agenda, adding that APRA is also working with Treasury on a possible fourth tier with lighter requirements for the smallest banks and considering whether similar proportionality changes may be appropriate in superannuation and insurance.
“APRA will continue to explore opportunities to more explicitly differentiate prudential requirements and implementation flexibility by tier when we develop a new standard or revise an existing one,” Hockey said.
APRA’s approach is aligned with the Basel Committee on Banking Supervision’s proportionality principles, with local adjustments to reflect the structure of the Australian system. The regulator emphasises that requirements should remain commensurate with an ADI’s systemic importance and risk profile, while avoiding “one‑size‑fits‑all” settings that could stymie innovation or unduly raise compliance costs for smaller lenders.
The three‑tier framework is one element of a broader program to reduce regulatory burden and support productivity.
In the first half of 2025–26, APRA has:
APRA also signals it will, after this banking consultation, turn its attention to proportionality in the insurance and superannuation frameworks, adjusting settings where appropriate.
APRA is inviting written submissions on the three‑tier proposal and associated questions – including whether the proposed $300 billion MSFI and $30 billion SFI thresholds are appropriate – by 27 February 2026.
Submissions should be sent to [email protected] and addressed to:
General Manager, Policy
Policy and Advice Division
Australian Prudential Regulation Authority
APRA plans to finalise the changes by the end of 2026, following industry feedback. A discussion paper, A more proportionate banking prudential framework, is available on APRA’s website and sets out the detail of the proposed tiering, timing, and policy development changes, along with how they respond to the CFR Review’s recommendations on competition in the small and medium banking sector.
APRA’s discussion paper makes clear the three‑tier model is part of a broader proportionality push: the regulator plans to embed tier‑based tailoring into all future standards and give non‑SFIs more time to comply with new rules as they are developed and implemented.
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