Australia Regulator Issues Confirmation to Phase Out AT1 Capital Instruments (Hybrid Bonds) from 1st January 2027 with All Existing AT1 to be Replaced by 2032, Large International Banks to Replace 1.5% AT1 with 1.25% Tier 2 & 0.25% Common Equity Tier 1 (CET1) Capital, Small Banks to Fully Replace AT1 with Tier 2 with Reduction in Tier 1 Requirements
11th December 2024 | Hong Kong
The Australian Prudential Regulation Authority (APRA) has issued a confirmation statement to phase out AT1 (Additional Tier 1) capital instruments (Hybrid bonds) from 1st January 2027, and with all existing AT1 to be replaced by 2032. Large international banks will replace 1.5% AT1 with 1.25% Tier 2 & 0.25% Common Equity Tier 1 (CET1) capital. Small banks to fully replace AT1 with Tier 2, and with reduction in Tier 1 Requirements. Announcement (9/12/24): “The Australian Prudential Regulation Authority (APRA) has confirmed it will phase out the use of Additional Tier 1 (AT1) capital instruments to simplify and improve the effectiveness of bank capital in a crisis. Following an extensive consultation process beginning last year and careful consideration of the potential options, APRA launched a consultation in September on a proposal to require banks to replace AT1 – also known as hybrid bonds – predominantly with cheaper and more reliable forms of capital that would absorb losses more effectively in times of stress. The move is one of a number of changes APRA introduced in 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 minimise the risk of contagion. APRA has consulted thoroughly on this policy proposal, with 23 written submissions received and discussions with various stakeholders including banks, industry associations, rating agencies, brokers, investors and peer regulators. Feedback was generally supportive of APRA’s proposal, with most respondents agreeing that AT1 does not meet the regulatory objectives of stabilising a bank experiencing financial stress or supporting resolution to prevent a disorderly failure. Some submissions did raise concerns with phasing out AT1, noting a range of impacts including investors losing access to AT1 as an investable product. 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. 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. As a result, APRA has today written to banks confirming it would proceed with plans to phase out AT1, while laying out a timeline for transitioning to the updated framework over the next eight years. APRA Chair John Lonsdale said the purpose of today’s letter was to provide certainty to industry so that banks and other stakeholders could start preparing for the transition. Under APRA’s proposed approach: 1) Large, internationally active banks will be able to replace 1.5 per cent AT1 with 1.25 per cent Tier 2 and 0.25 per cent Common Equity Tier 1 (CET1) capital. 2) Smaller banks will be able to fully replace AT1 with Tier 2, with a reduction in Tier 1 requirements. 3) APRA’s requirements applicable to internationally active banks will remain in line with international minimum standards. APRA will continue to consult industry on consequential amendments to the prudential framework. APRA intends to finalise changes to prudential standards before the end of 2025, with the updated framework to come into effect from 1 January 2027. Although APRA expects expect banks with surplus AT1 to replace it with Tier 2 Capital at their next call dates, APRA will consider requests to replace existing AT1 where the replacement does not increase the current level of AT1 capital instruments or extend call dates beyond 2032. Capital requirements for insurers will remain unchanged. The letter is available on the APRA website: Improving the effectiveness of Additional Tier 1 capital instruments.”
“ Australia Regulator Issues Confirmation to Phase Out AT1 Capital Instruments (Hybrid Bonds) from 1st January 2027 with All Existing AT1 to be Replaced by 2032, Large International Banks to Replace 1.5% AT1 with 1.25% Tier 2 & 0.25% Common Equity Tier 1 (CET1) Capital, Small Banks to Fully Replace AT1 with Tier 2 with Reduction in Tier 1 Requirements “
Australia Regulator Proposes to Phase Out AT1 Capital Instruments (Hybrid Bonds) from 1st January 2027 with All Existing AT1 to be Replaced by 2032, Large International Banks to Replace 1.5% AT1 with 1.25% Tier 2 & 0.25% Common Equity Tier 1 (CET1) Capital, Small Banks to Fully Replace AT1 with Tier 2 with Reduction in Tier 1 Requirements
12th September 2024 – The Australian Prudential Regulation Authority (APRA) is proposing to phase out AT1 (Additional Tier 1) capital instruments (Hybrid bonds) from 1st January 2027, and with all existing AT1 to be replaced by 2032. Large international banks will replace 1.5% AT1 with 1.25% Tier 2 & 0.25% Common Equity Tier 1 (CET1) capital. Small banks to fully replace AT1 with Tier 2, and with reduction in Tier 1 Requirements. Announcement (10/9/24): “The Australian Prudential Regulation Authority (APRA) has proposed changes to the capital framework for banks in relation to hybrid instruments to simplify and improve the effectiveness of bank capital in a crisis. The proposed changes, outlined in a discussion paper released today, seek to support financial system stability at times of crisis with simpler and more certain resolution of banks in the unlikely event of failure. They are also aimed at reinforcing confidence in the safety of deposits at times of stress. APRA is proposing that banks phase out the use of AT1 capital instruments (often called hybrid bonds) and replace them with cheaper and more reliable forms of capital that would absorb losses more effectively in times of stress. The total amount of regulatory capital that APRA requires banks to hold would remain unchanged and banks would remain ‘unquestionably strong’. The proposed changes draw on the lessons of last year’s global banking turmoil where several US and European banks either failed or needed to be resolved in short succession, with a number of governments having to intervene to minimise the risk of contagion and financial system instability. Today’s announcement follows an extensive consultation process that began with the release of a discussion paper last September asking for feedback on a range of ideas to improve the effectiveness of AT1 for use in a potential bank stress scenario. After receiving feedback from 26 submissions and more than 40 engagements, APRA identified three potential options: maintaining the status quo, redesigning AT1 to make it operate more effectively when required, or replacing AT1 with other existing, more reliable forms of capital. Under APRA’s proposed approach: 1) Large, internationally active banks would be able to replace 1.5 per cent AT1 with 1.25 per cent Tier 2 and 0.25 per cent Common Equity Tier 1 (CET1) capital. 2) Smaller banks would be able to fully replace AT1 with Tier 2, with a reduction in Tier 1 requirements. APRA has proposed commencing the transition to the simpler capital framework from 1 January 2027, with all current AT1 on issue expected to be replaced by 2032. APRA’s intention is for an orderly transition path with changes implemented over time. For existing investors, APRA does not envision an immediate impact with AT1 capital instruments continuing to be eligible as regulatory capital until their first call dates. APRA is not proposing changes to AT1 settings for insurers. A two-month discussion period has now commenced and APRA welcomes stakeholder feedback on the framework design, expected impacts, and other implementation considerations. More detail on the proposed changes is available in the discussion paper at: A more effective capital framework for a crisis.
Australian Prudential Regulation Authority (APRA) Chair John Lonsdale: “The purpose of AT1 is to stabilise a bank so that it can continue to operate as a going concern during a period of stress, and support resolution with the capital that is needed to prevent a disorderly failure. Unfortunately, international experience has shown that AT1 does not fulfil this function in a crisis situation due to the complexity of using it, the potential for legal challenges and the risk of causing contagion. These risks are heightened in the Australian context due to the unusually high proportion of AT1 held by retail investors. Replacing AT1 with more reliable forms of capital will enable banks to more quickly and confidently use their capital buffers in a crisis scenario and is expected to reduce compliance costs for banks. It will also strengthen the proportionality of the prudential framework by embedding a simpler approach to capital requirements for small and mid-size banks compared to the new requirements for large banks.”
Australian Prudential Regulation Authority (APRA) – 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 trillion in assets for Australian depositors, policyholders and superannuation fund members.
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