To boost competitiveness in the banking sector, the federal government is working to cut regulatory red tape for smaller and mid-sized lenders. This move raises concerns about safeguarding financial stability. Proposed changes include easing mandatory breach reporting rules and allowing more flexible compliance measures. Policymakers hope these steps will support innovation and growth for smaller banks while still managing systemic risk.
Currently, the country’s banking industry is highly concentrated, with the four largest banks controlling over 70% of the market. Smaller banks often deal with higher funding costs and stricter compliance standards, which limit their ability to expand. These reforms follow recommendations made in a Treasury-commissioned review that called for a more level playing field for non-major lenders.
The government has agreed to adopt eight out of nine recommendations from the Council of Financial Regulators, including the loosening of restrictions on issuing covered bonds, which are securitised assets used to raise capital. This could help smaller banks access funding more easily. Authorities will also examine whether these bonds can qualify as high-quality liquid assets, which would increase their attractiveness. Regulators have also suggested creating a simplified licensing system for banking startups. However, they declined to support publicly backed mortgage securities due to concerns about potential financial risks for the government.
These reforms indicate a move towards a more proportionate regulatory approach. The prudential regulator plans to introduce a three-tier framework that better aligns oversight with the size and complexity of each bank. Still, officials admitted that changes in competition will likely stem more from market shifts, including the rise of digital banking, than from regulation alone.
