The Australian Prudential Regulation Authority (APRA) has published a discussion paper on proposed changes to the capital framework for banks in relation to hybrid instruments.

APRA is proposing that banks phase out the use of Additional Tier 1 (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’.

Under APRA’s proposed approach:

• 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;
• 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.

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.

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