Banking regulatory changes - beyond the headlines

Yesterday, at the ABA Banking 2025 conference, APRA unveiled its three-tier regulatory framework to widespread applause. The sector celebrates "proportionate regulation" as a win for smaller banks.

But while the jubilation focuses on regulatory relief, the strategic implications suggest a more nuanced story: one of potentially accelerated consolidation through market dynamics rather than reduced compliance burdens for the smallest players.

What does the framework actually change?

• Tier 1 (Big Four): Unchanged regulatory intensity
• Tier 2 ($20bn+, Other SFIs): Streamlined requirements, reduced compliance burden
• Tier 3 (<$20bn): Simplified frameworks remain... simplified

The narrative: everyone wins through regulatory proportionality. The reality may be far more nuanced.

Who really benefits from these changes?

The Big Four gain a buffer. By creating an explicit middle tier, APRA just built them a regulatory moat. Any Tier 2 challenger now faces a clearly demarcated cliff to climb. Think of Formula 1 creating a new racing category: it doesn't slow down Mercedes, it just clarifies why Formula 2 teams can't compete directly.

Tier 2 banks are the genuine winners. Heritage/People First and NGM can redirect resources from compliance to competition (potentially 20-30% of current compliance spend). Streamlined IRB accreditation, clearer capital requirements, proportionate oversight: real savings, real competitive advantage.

But what about the 53 mutual banks in Tier 3?  This is where the celebratory narrative meets market reality. They gained... certainty. Not reduced costs or (more) simplified processes, just confirmation that their existing simplified framework is appropriate.

What are the strategic implications for mutual banks?

The framework's greatest impact may be what it takes away, not what it gives.

Previously, mutual banks approaching $20bn pursued aggressive acquisitions to amortise inevitable SFI compliance costs across a larger base. These institutions needed scale to offset regulatory overhead, making acquisitions economically rational for their growth strategy.

But with the proposed changes, streamlined Tier 2 requirements reduce (but don't eliminate) the step-up costs. Banks like Teachers Mutual still benefit from scale, but with more resources freed for productive investment, they can be selective. Why absorb a struggling institution when those same resources could enhance digital platforms or expand into attractive markets?

This could mean that the changes result in Tier 3 consolidation forced horizontally rather than vertically. Taken to an extreme, this might drive coalitions of struggling peers, where three $2bn mutuals merge to create one $6bn entity. Same operational challenges, triple the integration complexity, no competitive advantage unless they transform their business and operating model. Historically, this has been tricky, but maybe that’s what APRA wants – more competitiveness (fitness in the system), not necessarily competition (plurality).

Could this framework actually accelerate consolidation?

APRA's approach shifts bargaining power without changing small bank economics. By making Tier 2 more attractive for successful mid-sized banks, they've created a new market dynamic.

Small Tier 3 mutuals face the same fixed compliance costs they always have, creating relentless pressure to merge for scale. But now they must compete harder for acquirer attention. The beauty contest intensifies: strong governance, clean systems, attractive demographics, or unique capabilities become essential to attract larger Tier 3 partners with growth momentum.

Those without compelling strategic assets face an uncomfortable truth: when everyone needs to merge but acquirers can be selective, being merely "available" isn't enough. No more ‘merger of equals’ fairytales.

What's the strategic reality check?

APRA has been transparent about wanting a stronger, more sustainable banking sector through consolidation. This framework elegantly achieves that goal by creating a self-reinforcing market structure where each tier's optimal strategy naturally limits competition between tiers.

Success won't come from celebrating regulatory relief, but from honestly assessing where your bank sits in this new hierarchy. The critical question isn't "which tier are we in?" but "are we strong enough to thrive where we are?"

What does this mean for your bank's strategy? APRA has created clearer strategic pathways: a more comfortable environment for successful banks while maintaining the gravitational pull toward consolidation for smaller mutuals.

The question is whether your bank is positioned to navigate these pathways independently or through strategic combination.