Australia has made a groundbreaking move by announcing the phasing out of Additional Tier 1 (AT1) bonds as a form of bank capital. This decision aims to enhance the resilience of the banking sector in times of financial distress.
The Australian Prudential Regulation Authority (APRA) has proposed a framework that will allow large internationally active banks to replace 1.5 percent of their AT1 capital with 1.25 percent Tier 2 capital and 0.25 percent Common Equity Tier 1 (CET1) capital. Smaller banks will have the flexibility to fully substitute AT1 with Tier 2 capital, accompanied by a reduction in Tier 1 capital requirements. This regulatory change will take effect on January 1, 2027, and is expected to reshape the landscape of bank capital and investment strategies in Australia.
The decision to eliminate AT1 bonds is a response to the challenges faced by banks worldwide, particularly in the United States and Europe, where institutions have failed or required government intervention to stabilize the financial system. APRA's stance is supported by feedback from the industry, with concerns raised about the negative implications of this decision, including a diminished range of investment products available to investors. However, APRA remains firm in its belief that AT1 bonds do not effectively absorb losses while banks are operational, nor do they support resolution efforts adequately.
The elimination of AT1 bonds in Australia may influence other countries to reevaluate their own capital frameworks. This regulatory shift could serve as a model for other jurisdictions seeking to bolster their banking systems against future shocks.