The Australian Prudential Regulation Authority has finalised amendments to its bank prudential framework that remove Additional Tier 1 (AT1) capital instruments, also known as hybrid bonds, from eligibility as regulatory capital. The changes take effect on 1 January 2027 and allow banks to replace AT1 predominantly with other forms of capital, while phasing out existing AT1 over time with APRA expecting all bank-issued AT1 to be phased out by 2032. APRA cited international experience that AT1 has not provided the intended stabilising function in a crisis due to the complexity of using it, the potential for legal challenges and contagion risk, and said the revised framework should improve proportionality and reduce compliance and issuance costs, particularly for smaller banks. Outstanding AT1 will remain subject to their existing legal terms, including subordination, throughout the transition. The main change from APRA’s initial proposal is a leverage ratio set at 3.25% of Common Equity Tier 1 (CET1) capital rather than 3.5%, maintaining the current calibration after industry feedback. A response letter to banks and updated prudential standards, prudential practice guides and reporting standards have been published to support implementation, with ongoing industry engagement planned to facilitate a smooth transition.
Australian Prudential Regulation Authority 2025-12-04
Australian Prudential Regulation Authority finalises bank capital rules to phase out AT1 and set leverage ratio at 3.25% of CET1
The Australian Prudential Regulation Authority has finalized amendments to its bank prudential framework, removing Additional Tier 1 (AT1) capital instruments from eligibility as regulatory capital, effective 1 January 2027, with a complete phase-out by 2032. The revised framework, which includes a leverage ratio set at 3.25% of Common Equity Tier 1 (CET1) capital, aims to improve proportionality and reduce costs, with industry engagement to ensure a smooth transition.