Bank Failure Triggers Tighter Regulations

The Australian Prudential Regulatory Authority (APRA) has tightened its controls on new banking licences.  Under APRA’s new rules, new Authorised Deposit-taking Institutions (ADIs) will now have to provide both deposit and income-generating products. 

APRA announced that before a new banking entrant can have a two-year restricted ADI (RADI) licence, the new bank needs to present a business plan and is required to have contingency and exit plans should its banking business fail.  The new entrant ADI will also have to have tested both an income-generating asset (such as loans) and a deposit product before these products are approved by APRA to be offered to the wider public.

The banking regulator has also clarified capital requirements for neobanks at different stages of the restricted licensing process to facilitate an easier transition to a full licence and reduce capital volatility.  Restricted banks will have a $2 million deposit limit and are required to meet ongoing capital requirements (the higher of $3 million plus $1 million in a resolution reserve, or 20% of adjusted assets) with an additional three months’ operational expenses.

The RADI will be formally assessed by APRA during the restricted phase and the regulator will assess if the RADI holder is ready for a full licence.  If a new entrant bank already has a history of running a successful banking-related business, it can directly apply for a full banking license, which allows the bank to accept funds from the general public. 

The new banking licensing changes were initiated as a response to the collapse of neobank Xinja in 2020.  Xinja received its full unrestricted banking license from APRA in 2019. The primary cause of the neobank’s failure was it was offering deposit products to its customers before it had any income-generating sources such as loans (meaning it had to pay interest to customers before it was receiving any interest itself).  Due to delays in launching its income-generating products, Xinja was working to secure a capital investment which failed to materialise leading to Xinja’s demise soon after the first anniversary of receiving its license.  While no depositors lost money as APRA acted swiftly, shareholders were almost entirely wiped out meaning it was a close call for the government being exposed through its deposit guarantee scheme for the first $250,000 for every protected account holder with all other depositors who invested monies in excess of this amount being exposed to the balance of their deposit.

APRA stated the revised approach to banking licensing will “encourage more sustainable competition in the banking sector by ensuring new ADIs are better equipped to succeed”.  Currently, there are two RADIs in Australia being “in1bank” and “Alex Bank”.  Neobanks in the Australian market include Up, Volt, Revolut, Judo, Hay, Douugh, Tyro and 86 400 (purchased by NAB in May 2021).

As investors continue to search for yield amid a low interest rate environment, Amicus continues to advise conservative investors against depositing funds in these neobanks as several do not have a proven business model and established management and none has an extensive track record, credit rating or is publicly listed.  The few extra basis points offered on these neobanks’ term deposit interest rates are not sufficient for the additional risks in our opinion as demonstrated by the near miss for depositors funding Xinja.

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