APRA finalises hybrid bonds phase out framework
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The news: The Australian Prudential Regulation Authority (APRA) has finalised its framework for the phase out of additional tier 1 (AT1) capital instruments to help simplify and improve the effectiveness of bank capital in a crisis.
The framework will come into effect on 1 January 2027 with existing AT1 capital issued by banks to be phased out by 2032.
The context: APRA confirmed its decision to phase out AT1 capital in December 2024, with the framework having been through several rounds of consultation. The main change since the initial proposal is the imposition of a leverage ratio at 3.25% of common equity tier 1 capital, rather than 3.5% of common equity tier 1 capital.
APRA says the replacement of AT1 “predominantly with cheaper and more reliable forms of capital that would absorb losses more effectively in times of stress”.
What they said: “This release concludes our multi-year review of AT1, which aimed to address concerns from international experience where AT1 didn’t operate as intended due to the complexity of using it as going concern capital, the potential for legal challenges and the risk of causing contagion,” APRA member Therese McCarthy Hockey said.
“By phasing out AT1 as eligible bank capital and replacing it with simpler and more effective regulatory capital instruments, the Australian financial system will be more resilient and better able to withstand future shocks.”
The source: APRA media release
