APRA publishes Therese McCarthy Hockey's remarks to the 2026 COBA CEO and Directors Forum
The road to resilience for mutual banks
Key points
- “A smaller number of mutuals isn’t indicative of a sector in decline. To the contrary, the mutual banking sector continues to deliver solid aggregate performance, with growth outpacing system trends across assets, deposits and housing lending. But if we peer beneath these rosy headline figures, we see a widening structural divide between the largest mutuals and a long tail of small banks, some of which have cost structures, growth capacity and operating models that appear increasingly challenged.”
- “Banks of all sizes also need to be thinking carefully about how they manage the risks associated with incorporating advanced AI into their businesses. We completely understand why the potential for reduced costs and improved productivity is appealing for smaller banks. The key concern for regulators is that industry usage is expanding faster than understanding of the long-term risks and impacts.”
- “While all banks are feeling the squeeze as they seek to mitigate new and growing risks, we’ve seen that banks with greater economies of scale are better able to make the necessary investments and absorb the fixed costs of digital transformation. APRA holds some concern, however, that without the necessary deep pockets, some of the smallest mutuals will eventually find their business models are no longer viable.”
- “The smaller mutuals that are performing most strongly have robust strategies that recognise the way banking is evolving and face into those issues; they have strong governance, including directors with the skills and experience needed for a modern banking environment; they also have effective cost management and sound risk management practices.”
Good morning. It’s a pleasure to be back speaking to the leaders of the customer-owned banking sector again at this year’s COBA CEO and Director Forum.
A few months ago, KPMG published its annual report on Australia’s mutual banking industry1. The very first sentence declared that mutual banks were “at a crossroads”, citing “persistent margin pressure, rising regulatory expectations, and the need to modernise member experience”.
A crossroad evokes the idea of many possible ways to turn and from where APRA sits, there are mixed signals about the future. At the start of 2025, there were 56 customer-owned banks in Australia, down from more than 220 back in 1998, APRA’s first year of operation. Following four mergers last year, we are now down to 52. This trend will only accelerate in 2026. By the end of this year, we expect the number of mutuals to have fallen further given the number of mutuals currently engaging in, or considering, merger activity. To be clear, APRA has no target in mind for the ideal number of mutuals, but this is the trend.
A smaller number of mutuals isn’t indicative of a sector in decline. To the contrary, the mutual banking sector continues to deliver solid aggregate performance, with growth outpacing system trends across assets, deposits and housing lending. There are now four mutuals with assets of more $20 billion. In time, we expect to see several more COBA members become Significant Financial Institutions (SFIs), notwithstanding our intention to increase our SFI threshold by $10 billion.
But if we peer beneath these rosy headline figures, we see a widening structural divide between the largest mutuals and a long tail of small banks, some of which have cost structures, growth capacity and operating models that appear increasingly challenged. In the largest mutuals, operating profit grew healthily over the past 12 months, while actually falling among the medium to small cohort. Larger mutuals also have a noticeably lower cost-to-income ratio compared to the smallest mutuals.
APRA firmly believes there is a place for smaller mutuals in the market, and we also recognise the importance of choice for driving good community outcomes. Alongside our regulatory peers, we are consciously trying to support banks of all sizes to remain sustainable. APRA’s inaugural Symposium for small banks, which many of you attended yesterday, is one example of this effort. Another is our strategic priority of “getting the balance right” between safety and stability and other considerations such as competition and efficiency.
These initiatives will help but they won’t deliver a sustainable future for mutuals that don’t fully appreciate how they might be impacted by new technologies, changing consumer preferences and developments in the global financial system. As banking evolves, mutuals of all sizes must think carefully about whether their strategic plan has them on the road to a sustainable future or whether they need to change direction.
Road rules
The long-term trend towards consolidation among mutuals isn’t just an Australian phenomenon. According to the most recent statistical report of the World Council of Credit Unions (WOCCU), the number of mutual banks globally has fallen from 89,000 in 2017 to about 67,0002. Something striking in the WOCCU report is what mutual banks believe is the key for them to thrive into the future. The number one strategic priority cited in a WOCCU survey – ahead of member and asset growth, digital transformation and attracting more young customers – was “regulatory reform”.
Over the last 12 to 24 months, I’ve held enough discussions with COBA and mutual bank CEOs to know that regulatory reform is generally near the top of most mutuals’ wish-lists here too.
We have used that feedback to help form our responses to the Review of Small and Medium-Sized Banks by the Council of Financial Regulators’ (CFR) and the Australian Competition and Consumer Commission. Of the four recommendations in the report that APRA has committed to, all are in train and due to be completed by the end of 2026. In particular, our consultation to add a third tier to our banking prudential framework recently closed and we are now working through submissions. We are also engaging with Government on potential ways to further lower prudential requirements for the smallest banks, a fourth tier, should additional safeguards be put in place to mitigate the risks from disorderly failure.
On our commitment to improve transparency on capital, we have sought industry feedback on plans to better communicate the basis for Pillar 2 capital adjustments along with the actions or outcomes we need to see before removing or lowering them. As part of this initiative, we have begun sending enhanced PCR3 Review Letters to banks linking APRA’s concerns and entity actions to Pillar 2 outcomes, equipping banks with the information they need to act on key risks. You may have already received yours in this first batch – but if not, you’ll be hearing from us during this calendar year.
The other proposed regulatory reforms I want to touch on are the planned changes to capital and liquidity requirements outlined yesterday by APRA Chair John Lonsdale. The most relevant proposal for this group is that APRA will look at how we can modernise the Minimum Liquidity Holdings framework so as to better incentivise good risk management practice in a cost-considered way. We expect this will give smaller banks with stable funding the opportunity to redeploy funding into more productive lending, thereby improving earnings. While the package should be cost neutral for the banking sector, we expect the liquidity changes will generate some cost savings for smaller banks with more stable funding.
What I hope these initiatives demonstrate is that proportionality is not an afterthought for us – it’s embedded in everything we do. The mutual sector may not get all its “asks” through our policy development process, but you would be mistaken to assume we don’t think deeply about the needs of your sector.
Eyes on the road
Collectively, all these reforms should support competition from smaller banks by reducing regulatory burden and in some instances lowering the cost of business. But none is a panacea for the commercial pressures faced by smaller banks because – as the CFR Review found – “the main challenges for small and medium-sized banks’ competitiveness are market-driven”4.
I outlined some of these trends in my remarks here 12 months ago. They include the cost of developing and maintaining digital technologies; the related cost of cyber and scam protections; and the more complex risk environment created by an increasingly interconnected financial system. As I stand here today, these challenges are at least as acute as this time last year.
One issue that’s constantly front of mind for APRA is geopolitical risk, which John spoke about at length in his remarks yesterday. His key message was that events such as those unfolding in the Middle East underscore why financial system resilience is so important, especially for a mid-size, trade-exposed economy dependent on overseas markets for funding and investment.
While APRA is monitoring the situation closely and trying to pre-empt potential impacts on our financial system, so should you be. APRA occasionally gets the sense that some smaller banks think big international issues aren’t really their concern. That is simply not true. The reality is that small and mid-sized entities will be exposed to changes in the geopolitical environment and need to prepare for a range of financial risk transmission channels as well as non-traditional risks such as, for example, compromised personnel.
Banks of all sizes also need to be thinking carefully about how they manage the risks associated with incorporating advanced AI into their businesses. We completely understand why the potential for reduced costs and improved productivity is appealing for smaller banks. The key concern for regulators is that industry usage is expanding faster than understanding of the long-term risks and impacts. Whether harnessing AI for fraud and scam detection or customer engagement through chatbots, banks must invest adequately in governance and secure controls to ensure they don’t end up with automation and automated decision-making without proper human accountability. Balanced against this is the risk of banks moving too slowly and finding they can’t compete. Some banks have told me they are keen to be “fast followers” of AI innovations rather than being at the vanguard where the risk of mistakes is greatest. But if mutuals aren’t sufficiently investing in this space, they risk becoming “slow followers”, which brings its own dangers. Perhaps less a crossroads and more of a narrow path.
While all banks are feeling the squeeze as they seek to mitigate new and growing risks, we’ve seen that banks with greater economies of scale are better able to make the necessary investments and absorb the fixed costs of digital transformation.
APRA holds some concern, however, that without the necessary deep pockets, some of the smallest mutuals will eventually find their business models are no longer viable.
Mapping the way ahead
At this point, I want to be very clear about what APRA is – and is not – saying. We are not saying “big is good, small is bad”. There are larger banks, including some outside the mutual cohort, that are finding the operating conditions challenging while some smaller banks are not only surviving but thriving.
But we are saying that smaller is harder and unlikely to get easier as the financial services industry evolves to become more technology dependent. Without the scale advantages that the major banks and mid-tiers can fall back on, all COBA members are going to need to be smart, agile and innovative to ensure their long-term sustainability.
The smaller mutuals that are performing most strongly have robust strategies that recognise the way banking is evolving and face into those issues; they have strong governance, including directors with the skills and experience needed for a modern banking environment; they also have effective cost management and sound risk management practices. Often, they have a specialist market or business model that allows them to differentiate themselves from competitors, but not one so niche that it leaves them with an inadequate pool of potential customers.
They’re also thinking innovatively, and that’s something we are very open to seeing more of among COBA members. We know, for example, that mutuals are big users of third parties as they seek to optimise costs, meet customer expectations and access specialist capabilities. These include shared core banking platforms, managed IT services, payments systems, cloud storage and cyber security. There may be opportunities for mutuals to collaborate, pool resources, or explore shared solutions. Shared models may help mutuals access higher‑quality services than they could afford on their own and build collective resilience, however, collaboration must be approached with care. Pooling can unintentionally deepen concentration risk and reduce optionality in a crisis.
APRA has been looking closely at this issue through our work on material service providers under CPS 230 Operational Risk Management. Our analysis shows the mutual sector already has a heavy reliance on a small group of technology providers. This creates sector‑wide vulnerabilities that need to be understood and managed proactively. A first step for all mutuals is to deepen their understanding of where their material dependencies sit and what those dependencies mean for operational resilience.
Trying to balance the potential benefits of greater pooling with the risks of concentration isn’t easy. What we would urge mutuals is to engage early and often with APRA where you have innovative ideas for pooling resources. We plan to share our initial insights from CPS 230 with you over the coming months and want to maintain an open dialogue, understand your plans early and provide industry-wide insights that may help navigate potential challenges. I hope you were able to get that sense from yesterday’s Symposium, which we intend to become a regular event.
Where the rubber meets the road
Size isn’t everything in banking, and there will always be a place for local knowledge, personal relationships and investing back into communities. The fact that the mutual sector is outperforming the wider banking sector in many areas is evidence of the enduring appeal of the customer-owned business model.
But size is also not nothing, which is why so many mutuals are seeking the financial benefits of scale by merging with like-minded partners. As this trend continues apace through 2026, the structural gap in the mutual sector is likely to further widen. The largest mutuals will benefit from scale, consolidation tailwinds and more efficient cost structures. And while some of the smallest mutuals will continue to punch above their weight, others will struggle with high cost-to-income ratios and declining profitability. In certain dire cases, there is a risk that these banks are not seen as attractive partners because the merger and integration costs outweigh the prudential and member benefits, leaving them few options to arrest the slide.
If mutual banks are indeed at a crossroads, then it seems to APRA that the potential roads of travel are achieving growth by being bold, agile and innovative; finding a like-minded merger partner; or remaining in the same lane delivering more of the same – which APRA sees as the highest risk option
So as I wrap up now, I’d like to leave you with some questions to think about. Do you have the right strategic plan for a modern banking environment that sets your business up for long-term sustainability? And if you’re not sure the answer is “yes”, are you willing to keep driving until you reach a dead-end? Or will you take the wheel now while there’s still time to change the road you’re on?
Footnotes
3Prudential Capital Requirement, which refers to an APRA-regulated entity’s minimum risk-based capital adequacy requirements.
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, mutuals, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding around $9.8 trillion in assets for Australian depositors, policyholders and superannuation fund members.