APRA toughens up on new bank licences

In the wake of Xinja’s banking failure, the regulator has toughened up on its requirements for new licences.

Australian Prudential Regulation Authority Deputy Chair John Lonsdale at the House Economics Committee hearing at Parliament House in Canberra. Picture: AAP/Mick Tsikas)

The prudential regulator has proposed stronger requirements to obtain a banking licence, with a greater emphasis on longer-term sustainability rather than the short-term ambition of getting a licence.

In an information paper released on Thursday, the Australian Prudential Regulation Authority also proposed closer supervision of new entrants as they sought to establish themselves.

APRA deputy chairman John Lonsdale said the new approach would support newly licenced banks to they were better equipped to succeed.

“Since launching the restricted (licencing) regime three years ago, we’ve gained a deeper understanding of the challenges new and aspiring banks face as they try to establish themselves in an industry that is capital intensive and dominated by some of the best resourced companies in Australia,” Mr Lonsdale said.

“This revised approach effectively targets key risks for new entrants, setting a higher bar for gaining a bank licence, while enhancing competition by making it more likely new entrants can find their feet and gain a firm foothold in the market.”

Among the proposed changes were stronger capital requirements and an ability to immediately attract depositors and earn revenue; additional supervisory attention from APRA until they’re firmly established, and an improved ability to exit the industry in an orderly way if they ultimately failed to succeed.

The review, started last August, follows the move by neobank Xinja earlier this year to hand back its banking license and return all deposits to its customers.

Xinja was seen to have failed partly because it launched a high-priced deposit product called Stash without any revenue from lending.

By June last year, the neobank had attracted $457m in deposits and raised $89.2m in capital from investors.

The equity base, however, had shrunk to $25m after accumulated losses of $64.2m.

Xinja desperately needed more capital but the final blow came when a $433m investment from Dubai-based World Investments, flagged by Xinja in March 2020, failed to materialise.

APRA said in an information paper that it recognised new banks had unique challenges and risk profiles compared to established institutions.

The regulator said it was seeking to strike an appropriate balance between supporting entities to enter and thrive in the banking sector, while ensuring financial system stability and protection of depositors’ interests.