APRA Moves to Phase Out AT1 Instruments: What Changes and What It Means
APRA, the Australian prudential regulator, released a detailed update on 4 December outlining changes aimed at phasing out Additional Tier 1 (AT1) capital instruments—commonly known as hybrid bonds—from being eligible as regulatory capital for authorised deposit-taking institutions (ADIs). The letter, available on APRA’s site, responds to stakeholder submissions from its consultation and sets out the revised prudential and reporting standards, as well as updated prudential practice guides, in line with feedback received since the July consultation.
What’s changing
In response to industry input, APRA has implemented several key adjustments:
- Leverage ratio minimum lowered: The required minimum leverage ratio has been reduced from 3.5% to 3.25%, calculated on a Common Equity Tier 1 (CET1) basis. This adjustment helps prevent an unintended tightening of the leverage constraint while the AT1 phase-out progresses.
- Clarified deduction rules for offshore Tier 2 or Total Loss Absorbing Capacity (TLAC) instruments: APRA has clarified its policy to require eligible Tier 2 capital or TLAC instruments issued by an overseas subsidiary and held by the Australian parent to be deducted from the parent’s Tier 2 capital. This aligns with APRA’s established policy framework and ensures consistency across jurisdictions.
Implementation timeline and next steps
The updated prudential standards and guidance take effect on 1 January 2027. Banks should plan to meet the revised reporting requirements in time for the March 2027 quarter reporting period. APRA’s objective is to ensure a smooth transition as AT1 instruments are gradually phased out of eligible regulatory capital, while maintaining sound risk management and capital adequacy practices.
Why this matters for banks and investors
- For banks, the adjustments provide clearer rules and a slightly more flexible leverage threshold during the transition away from AT1 instruments, helping to manage capital planning and risk-weighted outcomes.
- For investors and market participants, the clarified deduction rules for intragroup cross-border capital help set expectations around capital treatment and cross-border instrument eligibility during the phase-out period.
Controversial points and questions for discussion
This reform invites debate on several fronts. Is the 3.25% leverage ratio sufficient to maintain resilience without hampering funding diversity? Do the clarified deduction rules adequately address cross-border capital flows and potential unintended consequences for international bank structures? As the 2027 deadline nears, what other transitional measures would improve market clarity and financial stability?
If you have a view on whether AT1 instruments should be completely excluded from regulatory capital or retained under a more tightly defined framework, share your perspective in the comments. And this is the part many stakeholders wonder about: could the phase-out accelerate shifts in funding strategy that could affect ADIs’ funding costs and resilience in stress scenarios?
