The financial regulator of Australia confirmed that the use of Additional Tier 1 bonds as bank capital will be phased out to better deal with potential crises.
The Australian Prudential Regulation Authority (APRA) will phase out the use of Additional Tier 1 (AT1) capital instruments, according to a statement. The move is expected to «simplify and improve the effectiveness of bank capital in a crisis».
Under APRA’s proposed approach, large internationally active banks will be able to replace 1.5 percent AT1 capital with 1.25 percent Tier 2 and 0.25 percent Common Equity Tier 1 (CET1) capital. Smaller banks will be able to fully replace AT1 with Tier 2, with a reduction in Tier 1 capital requirements. The updated framework will come into effect from 1 January 2027.
Lessons From 2023
Australia becomes the first country worldwide to scrap the usage of AT1 as eligible capital. This follows the collapse of Credit Suisse in 2023 which saw the subsequent $17 billion write-off of the hybrid bonds amid a government-brokered rescue by UBS.
According to APRA, the latest move is a «response to lessons from last year’s overseas banking turmoil where several US and European banks either failed or required rescue, and where Government intervention was required to restore stability and minimize the risk of contagion».
«Capital is the cornerstone of the banking system’s ability to withstand financial stress,» commented APRA chair John Lonsdale. «While Australia’s banks are unquestionably strong, overseas experience has shown AT1 doesn’t operate as intended during a crisis due to the complexity of using it, the potential for legal challenges and the risk of causing contagion.»
Industry Feedback
After consulting with the industry on the policy proposal, APRA received 23 written submissions with «most respondents agreeing that AT1 does not meet the regulatory objectives of stabilizing a bank experiencing financial stress or supporting resolution to prevent a disorderly failure». Some noted various negative effects, including a reduced universe of products for investors.
«APRA acknowledges these concerns but remains of the view that AT1 does not do effectively what it is intended to do: absorb losses while the bank is a going concern and support resolution,» the regulator added.
«An effective regulatory framework in a crisis is important to safeguard the interests of depositors, limit risks to financial stability, and avoid the need for taxpayer funded support.»
