Home /

Banking on APRA?

This is the first of a series of papers highlighting how Australia’s prudential regulator, the Australian Prudential Regulation Authority (APRA), interacts with some of the financial service entities it is charged with regulating and supervising.

It is refreshing to see the supportive and helpful approach from APRA when communicating with and supervising regulated entities. The APRA Statement of expectations 2018 (Paper) indicates, “…the Government expects APRA to have an open and sound working relationship with supervised entities and to ensure that industry participants are encouraged to communicate considered and candid views to APRA. In doing this APRA should keep abreast of key emerging issues, opportunities, trends and behaviours in prudentially regulated sectors.”1

Further, APRA advises its “role is to promote prudent behaviour by institutions through a robust prudential framework of legislation, prudential standards and prudential guidance, which aim to ensure that risk-taking is conducted within reasonable bounds and that risks are clearly identified and well-managed”.2

Clearly, APRA is proving to be the lead regulator in the financial services sector and continues to develop policy designed to ensure a robust and sustainable sector is maintained. Its approach to dealing with new entrants to the banking sector is discussed in the Paper.

On 11 August 2021, APRA released its revised approach to the licensing and supervision of new authorised deposit-taking institutions (ADIs). This is for both direct (full ADI licence) applicants and restricted ADI (RADI) licence applicants under the Banking Act 1959 (Cth). The RADI licensing framework launched in 2018. It was designed to promote competition in the banking sector by providing a pathway for aspiring ADIs to gain a licence to conduct limited banking business, whilst they prepare to meet the more stringent requirements of a full ADI licence. The first RADI, the neobank  Volt, launched in May 2018 and achieved full ADI status in January 2019.

APRA began the review of its licensing approach to ADIs following its experience with now defunct neobank3 Xinja, which launched in May 2017 and was the first independent Australian neobank. As a result of this review, APRA recognised that the typical application of APRA’s prudential and supervisory frameworks was not always suited to the common characteristics of new entrants.

The regulator received ten written submissions to its review. These submissions came from potential new banking industry entrants, industry associations and professional services firms. Several respondents suggested that APRA’s overall approach should be to provide more specific detail on requirements regarding the licence assessment and supervision processes. The rationale given was that the clearer APRA’s exact expectations, the easier it is for applicants or newly licensed entities to meet them.

On 18 March 2021, APRA released a discussion paper APRA’s approach to new entrant authorised deposit-taking institutions, and an accompanying information paper ADIs: New entrants – a pathway to sustainability, which outline the new requirements for RADIs, new ADIs and established ADIs.

Under the new framework, before an entity can gain a RADI licence, it must present a business plan, as well as a credible strategy to meet the prudential framework for new ADIs within a period of two years, including launch of products, and a contingency plan, that includes at least one option to execute an orderly and solvent exit from banking.

APRA’s governance standards generally apply to RADIs, however, some concessions are made. For example, a RADI does not require a majority of independent directors nor does it need to have established the committees mandated under Prudential Standard CPS 510 Governance during its restricted period.

RADIs need to achieve a limited launch of both an income-generating asset product and a deposit product before they can gain an ADI licence. Previously, RADIs were allowed to release new products within the limits of the asset threshold, but it was not a requirement to reach a full banking licence. Instead, they only needed to meet the requirements of the prudential framework or legislation that applies to the prudential regulation of banks, within two years.

A summary of the key differences in applying APRA’s prudential framework to each category of ADI is listed below:4 

Restricted ADI (where applicable)  New ADI Established ADI 
  • Initial capital — ongoing capital requirement plus three months’ operational expenses
  • Ongoing capital — $3m plus $1m resolution reserve 
  • Capital conservation buffer (CCB) — none 
  • Contingency plan — primary focus on return of deposits
  • Deposit limit — $2m aggregate cap on deposits
  • Initial capital — higher of $15 or nine months’ operational expenses
  • Ongoing capital — higher of $10m, rolling 6 months’ operational expenses or percentage of risk-weighted assets (RWAs)
  • CCB — $2.5m or 25% of six months’ rolling operational expenses or 2.5% of RWAs 
  • Contingency plan — evolving with business: likely to be return of deposits in early stages
  • Deposit limit — may apply some controls on growth
  • Capital — calculated on a risk weighted basis as per APRA standards
  • CCB — 2.5% of RWAs
  • Contingency plan — must demonstrate how ADI can recover or exit
  • Deposit limit — no limit or controls on deposit growth


APRA’s supervisory response continues to evolve in light of changing circumstances in the financial services sector. This is proven by the introduction of the RADI category to meet the needs of new entrant to the banking sector in 2018, followed by a review of ADIs that began in 2020, and the revisions announced in August 2021. APRA’s role in protecting the stability and soundness of regulated entities is especially important at the present time where the COVID-19 continues to shake our economy. 

In my next paper, I will discuss how ADIs can comply with APRA’s prudential standards with a specific focus on governance, since ultimately it is the board that will be held responsible for any compliance failure.

For more information, feel free to contact us


1 APRA, Statement of expectations 2018, www.apra.gov.au/statement-of-expectations-2018

2 APRA, Statement of intent — September 2018, www.apra.gov.au/statement-of-intent-september-2018

3 Neobanks, also known as digital banks, are financial institutions that operate exclusively online with no physical branches.

4 Adapted from APRA, 2021, ADIs: New entrants — a pathway to sustainability (Information Paper), www.apra.gov.au, p. 8.

Stephen Howell
Director and Principal Advisor
Stephen is the Principal Advisor for Effective Governance Pty Ltd, a corporate governance consultant, forensic accountant and company director.