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Australia to Replace AT1s With Tier 2s and CET1 Capital From 2027
December 9, 2024
The Australian Prudential Regulation Authority (APRA) has gone ahead to decide implementing their proposal in September to phase out AT1 bonds, following the collapse of Credit Suisse last year. The changes will be finalized by end-2025 and be implemented from January 2027. APRA maintained that AT1 bonds do not effectively absorb losses while a bank remains operational and is therefore pushing for cheaper and more reliable alternatives. Australia’s big four banks each hold AT1 bonds equal to at least 1.5% of their risk-weighted assets (RWAs). APRA’s updated framework will allow banks to replace these AT1 bonds with a mix of 1.25% Tier 2 capital and 0.25% CET1 capital. Smaller lenders would be able to fully replace AT1 with Tier 2 instruments. While some investors have raised concerns about losing access to AT1s, APRA believes these new instruments will provide better support for bank stability. The AT1 market in Australia is worth about AUD 40bn ($26bn), with the country’s major banks holding significant amounts. Australia will be the first country to phase out AT1s.
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