Two banks, the same $500,000 loan, and a capital requirement 2.4 times higher. Both hold the same regulatory licence to operate.
Consider a single, unremarkable loan.
Five hundred thousand dollars. Owner-occupied. Principal and interest. Secured over a house worth a million. Fifty per cent loan-to-value. The kind of loan Australian banks write several thousand times a week without anyone thinking twice about it.
Now write that loan twice. Once at an established bank on the standardised approach. Once at a bank authorised last month.
Same borrower. Same security. Same credit risk. Same prudential framework, same , same standard.
What a risk weight does
A bank does not hold capital against the face value of a loan. It holds capital against a risk-weighted version of it, which is the loan scaled up or down according to how risky the rules judge it to be.
A well-secured owner-occupied mortgage at fifty per cent loan-to-value carries a low weight. An unsecured business loan carries a much higher one. The same dollar of lending therefore consumes very different amounts of capital depending on what it was lent against.
This is why a requirement of 8 per cent does not mean eight cents of equity for every dollar lent. The percentage applies to the risk-weighted figure, not to the loan.
APS 112 on credit risk →Against an identical $500,000 owner-occupied loan at 50 per cent loan-to-value.
Two and a half times the equity for an identical exposure. Nothing about the loan explains the gap. The only difference between the two institutions is that one of them is new.
Where the number comes from
A new is not simply held to the published prudential minimums. It is set a by APRA, institution by institution, during the pre-application process.
What an ADI is
An authorised deposit-taking institution, almost always shortened to ADI, is the legal term for a business permitted to take deposits from the public in Australia. Banks, building societies and credit unions are all ADIs.
The authorisation is granted by APRA under the Banking Act, and it is what separates a bank from any other lender. A finance company can lend you money without one. Only an ADI can hold your deposit.
This article concerns an applicant seeking that authorisation, and the capital settings attached to it.
APRA's register of ADIs →What a Prudential Capital Requirement is
The published capital rules set a floor that applies to everyone. On top of that, APRA sets each institution its own Prudential Capital Requirement, decided case by case and not made public.
It is a supervisory judgement rather than a formula. APRA can set it above the published minimums where it considers an institution carries risks the standard rules do not capture, and it can reduce it later.
For a new entrant it is settled during the pre-application process, before the licence is granted. That is the number this article is about.
APRA licensing guidelines for ADIs →Our proposed ADI has been advised of a Prudential Capital Requirement of a minimum 18 per cent, to be met entirely with , alongside a requirement of 20 per cent. APRA has indicated the capital requirement may be set higher still.
What Common Equity Tier 1 means
Capital is not money set aside in a vault. It is the share of a bank's lending funded by its owners rather than by depositors and other lenders. When loans go bad, that is what absorbs the loss, before any depositor is touched.
Common Equity Tier 1 is the strictest form of it: ordinary shares and retained profits. It has no maturity date, nothing has to be repaid, and no interest is owed on it. It is first in line to absorb a loss, which is why it is treated as the highest quality capital, and why it is also the most expensive kind for a bank to raise.
So when this article says a bank holds $9,592 against a loan, it means shareholders funded that much of it.
APS 111 on measurement of capital →What Minimum Liquidity Holdings means
Capital answers the question of what happens if loans go bad. Liquidity answers a different one: what happens if depositors ask for their money back at once. A bank can be entirely solvent and still fail because it cannot find the cash on the day.
Minimum Liquidity Holdings is the simpler of the two liquidity regimes APRA operates, and it applies to smaller banks. It requires holding a set percentage of liabilities in assets that can be turned into cash quickly, such as government bonds and deposits with other banks.
Those assets earn less than loans do, so a higher requirement is a direct cost. Twenty per cent against the nine per cent an established bank holds is the gap described here.
APS 210 on liquidity →The comparable figure for an established standardised ADI is 8.00 per cent: the 4.50 per cent minimum, plus a 2.50 per cent capital conservation buffer, plus the 1.00 per cent countercyclical buffer. For a major bank on internal models, with the and the larger conservation buffer, it is 10.25 per cent.
What the D-SIB surcharge is
D-SIB stands for domestic systemically important bank. APRA applies the label to the four majors, ANZ, Commonwealth Bank, NAB and Westpac, on the basis that the failure of any one of them would damage the Australian financial system.
Because the consequences of their failure are larger, they carry an extra capital charge of one percentage point of Common Equity Tier 1 on top of the ordinary requirement.
This is the charge that puts a major bank on internal models at the 10.25 per cent quoted here.
APRA on capital buffers in banking →Eighteen against eight. That is the arithmetic, and it flows through to every loan on the book.
The composition compounds it. A start-up ADI has been advised it may not count toward that requirement, Tier 2 being loss-absorbing regulatory capital available to every other ADI in the country. From 1 January 2027, smaller banks will be able to fully replace Additional Tier 1 with Tier 2, and APRA has said this will reduce the cost of capital for smaller banks relative to larger ones. Excluding new entrants from the instrument runs directly against that reform, and leaves the most expensive form of capital as the only form available to the institution least able to raise it.
What Tier 2 capital is
Not all regulatory capital is shareholders' equity. Tier 2 is the next layer down, mostly subordinated debt, which is borrowed money whose lenders agree to rank behind depositors and ordinary creditors if the bank fails.
It still absorbs losses, which is why it counts toward the requirement, but it is considerably cheaper to raise than equity because it carries a fixed return and a maturity date. Additional Tier 1 sits between the two, closer to equity in how it behaves.
Every established ADI can count Tier 2 toward its requirement. The point made here is that a new entrant has been told it may not.
APS 111 on measurement of capital →So does the liquidity requirement. Liquid assets are themselves risk-weighted, so holding 20 per cent of the funding base rather than nine quietly enlarges the capital requirement as well.
Each setting is defensible in isolation. Together they produce a business that cannot be financed.
This is not a pricing problem
It is tempting to assume a new entrant can engineer its way out: a cheaper operating model, a better funding mix, smarter technology.
It cannot. A 2.4x capital disadvantage is not a 20 basis point cost-to-serve problem. No pricing, funding, operating or technology advantage available to any Australian lender closes a gap of that size. A business required to hold nearly two and a half times the equity of its comparable competitors cannot price competitively, cannot generate a return that attracts equity, and therefore cannot be financed.
That is not a prudential judgement about the quality of any particular applicant. It is an outcome that forecloses entry.
The reforms are good, and beside the point
APRA is consulting on a more efficient and transparent bank licensing framework. Codifying licensing expectations in legally effective criteria, committing to a defined twelve-month assessment period, and publishing licensing decisions are each genuine improvements, and we support all three without reservation.
But the licensing criteria measure whether an applicant is fit to hold a licence. They are silent on whether the licence, once held, is usable. A bank applicant can demonstrate every criterion, a supervisable structure, sufficient resources, suitable skills, a risk management framework, credible recovery and exit plans, and still be handed capital and liquidity settings under which no rational investor would fund the business.
Transparency about an unequal requirement does not make it equal.
The government's is to give new entrants the best possible chance of success and to support competition in banking. On the current settings, the licensing process is not what prevents that objective being met.
Where that objective comes from
In July 2024 the Treasurer asked the Council of Financial Regulators, working with the ACCC, to review the small and medium-sized banking sector. The final report was released on 6 August 2025, making nine recommendations to government and setting out nine actions for regulators.
The government accepted eight of the nine recommendations in principle. It described the aim as a more dynamic, diverse and resilient Australian banking sector, and said the package was about supporting smaller banks to drive stronger competition.
Action 6 of that review asked APRA to make its licensing framework more transparent and efficient. The consultation this submission responds to implements that action.
The Treasurer's response to the CFR review →What we have asked for
We are not asking APRA to lower prudential standards. We are asking that the same standard apply to the same risk, and that any genuine new-entrant risk be priced openly rather than bundled into an undifferentiated premium. Our submission makes four recommendations:
- Show the working. Where a new entrant's requirement exceeds that of a comparable established ADI, identify the risk, the quantum attributed to it, and the timeframe on which it will be reduced.
- Publish the range. Disclose the capital and liquidity settings applied to new entrants over the past five years, without identifying applicants.
- Fix the revenue-generating product criterion. Require operational readiness to offer a product, not revenue already earned from one, aligning the Criteria with the Guidelines.
- Restore Tier 2. Confirm that a new ADI may count qualifying Tier 2 instruments toward its requirement on the same basis as any other ADI.
Why a technology company is writing about capital
TSG Technology exists because the economics of running a bank have changed. The cost base that once made scale a prerequisite, core systems, integration layers, manual operations, headcount, has been substantially rewritten by AI-native infrastructure. Much of the historical cost disadvantage of being small is now an engineering problem with a known solution.
Capital settings have not moved with it. And a capital requirement of 2.4 times your competitor's overwhelms any operating efficiency a modern platform can deliver.
So the binding constraint on competition in Australian banking is no longer technological. It is prudential arithmetic. That is worth saying plainly, because the alternative is a decade of well-informed applicants and no new banks.
Treasury Services Group Pty Ltd (AFSL 315347 / ACL 315347) lodged this submission with APRA on 23 July 2026 in response to the consultation A more efficient and transparent bank licensing framework. The full submission, including the comparative capital analysis and our earlier submission to the Council of Financial Regulators' Review into Small and Medium-sized Banks, is available on request.
