Australian Prudential Regulation Authority finalises bank capital reforms to phase out Additional Tier 1 instruments and set a 3.25% leverage ratio

The Australian Prudential Regulation Authority has finalised amendments to its bank prudential framework that will remove Additional Tier 1 (AT1) capital instruments, or hybrid bonds, as eligible regulatory capital and allow banks to replace AT1 predominantly with other forms of capital. The new framework is due to take effect on 1 January 2027, with existing AT1 expected to be fully phased out by 2032. The package is intended to address APRA’s view that international experience shows AT1 does not provide stabilisation in a crisis because of its complexity and the risk of contagion, while also improving proportionality and lowering compliance and issuance costs, particularly for smaller banks. Existing AT1 will transition out gradually under their current legal terms, including subordination. 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%, to maintain the current calibration following industry feedback. APRA also published a letter to banks responding to consultation submissions, alongside the updated prudential standards, prudential practice guides and reporting standards, and signalled ongoing industry engagement to support implementation.