Soon it will be easier to become a bank

Regulation makes it hard to set up a new bank in Australia. But the Government says the banking system should be more competitive.

Well, wouldn’t it be more competitive if they made it easier to become a bank?

Finally, something is being done.

The Australian Prudential Regulation Authority (APRA) recently unveiled its proposals to revise the framework for licensing authorised deposit-taking institutions (ADIs).

APRA plans to introduce a phased approach to ADI authorisation to make it easier to get through the bank licensing process. There will be a new “Restricted ADI” licence.

A Restricted ADI would not be allowed to actively conduct banking business and would have limits on the maximum size of deposits from a single depositor ($250,000) and on the aggregate amount of deposits ($2 million), as well as minimum capital adequacy and liquidity holdings, restricted product and service offerings, and reporting and disclosure requirements.

APRA believes that these restrictions will create an incentive for a Restricted ADI to complete its business and systems development and progress to a full banking licence.

What will be the minimum requirements for a Restricted ADI licence? The applicant will need at least $3 million plus wind-up costs in start-up capital. Directors and senior management will have to meet APRA’s fit and proper standards. Applicants will also have to demonstrate the capability to deliver reliable information required under the Financial Claims Scheme.

Before granting a Restricted ADI licence, APRA will assess the applicant’s structure, ownership, governance, and business plan. Applicants will be required to provide details of their strategy to meet the ADI prudential framework, and an exit plan.

Subject to these restrictions, APRA proposes that some of the prudential requirements that apply to regular ADIs will not be fully applicable to a Restricted ADI.

The Restricted ADI licence would run for up to two years. This is the expected timeframe for an institution to meet the prudential requirements for a fully-fledged bank.

During the Restricted ADI licence phase, APRA will assess the institution’s progress. If it’s clear that the Restricted ADI will not reach the requirements for a regular ADI by the end of the Restricted ADI licence phase, APRA will require the institution to exit the banking industry.

APRA’s move to a start-up bank licensing regime is similar to ASIC’s recent initiative to introduce a “regulatory sandbox” for financial services and credit licences. It also follows the example of UK banking regulators who introduced a limited banking licence in 2013.

Hopefully the new Restricted ADI licence when implemented by APRA will lead to a new wave of market entrants in the Australian banking sector. In recent times, new entrants have mainly been foreign banks establishing operations in Australia.

By contrast, last century in the fifties and sixties, hundreds of new banks were formed by voluntary co-operative efforts of ordinary Australians. They weren’t called banks, they were called credit unions. But they took deposits and made loans, just like banks. The only difference was that they were owned by their customers. It’s hard to imagine such a movement happening today with all the regulation of banking and financial services.

Since then, many credit unions have merged into larger organisations. Some of the biggest have already converted to banks after the Federal Government’s “Competitive and Sustainable Banking System” reforms in 2010 allowed credit unions and building societies to call themselves banks if they met APRA’s $50 million minimum capital requirement for a bank. New names in the market such as Beyond Bank, Defence Bank, Bank Australia and RACQ Bank are all former credit unions.

And now a Bill before Parliament will make it possible for even small mutual ADIs to become banks. The proposed legislation will amend the Banking Act so that current restrictions on the use of certain words and expressions, including the terms ‘bank’, ‘banker’ and ‘banking’ will be removed for all ADIs, unless APRA has issued a determination that prohibits their use. When this legislation is in place, it’s expected that many of the remaining smaller credit unions will follow their larger colleagues and change their names to include ‘bank’. A whole new cohort of little banks will emerge.

Surely that will be good for banking competition.