The Australian Prudential Regulation Authority (APRA) will formalize a three-tiered approach to proportionality in the framework for banking, with the tiers roughly corresponding to large banks, medium banks, and small banks, which will allow for more flexibility between requirements for different bank business models, the regulator's Chair John Lonsdale said in a speech on Thursday.

The prudential watchdog will streamline, simplify, and clarify its accreditation process that allows banks to use the internal-ratings-based approach to calculating risk-weighted assets.

It will also amend its bank licensing framework to make its expectations more transparent and the process more efficient, Lonsdale said.

It committed to better communicate to banks its decisions on minimum capital requirements under pillar 2 of the Basel framework, and what risks need to be addressed for certain capital adjustments to be removed or lowered.

The regulator also plans to hold talks with entities around the implementation aspects of its various macroprudential tools to manage lending risks, including limits on some riskier forms of lending.

It will conduct a series of prudential reviews into how regulated entities are complying with the new prudential standard on operational risk management, starting with significant financial institutions before extending reviews to other financial institutions. It will also conduct further reviews to understand how these entities are meeting the requirements of the prudential standard on information security.

As part of the Council of Financial Regulators' review of small and medium banks, APRA identified areas where it can make regulatory requirements simpler and "provide more scope for sensible risk-taking," while emphasizing increased vigilance in other areas, in particular cyber, operational, and geopolitical risk

The review looked at how regulation and other barriers impact the ability of small and medium banks to compete. The treasurer of Australia sent letters to APRA and other regulators asking them to identify measurable actions to reduce compliance costs for the financial system, without compromising standards.

APRA's initiatives will support the country's mid-tier and international banks to offer more competitive services for customers, and the banks are ready to work with the regulator to ensure these commitments are implemented effectively, the Australian Banking Association's Chief Executive Anna Bligh said.