Australia’s national prudential regulator will require banks to replace Additional Tier 1 (AT1) capital instruments with other forms of capital to strengthen them during a crisis.
The Australian Prudential Regulation Authority (APRA) said these instruments, also known as hybrid bonds, would be phased out and replaced with cheaper and more reliable forms of capital that would absorb losses more effectively in times of stress.
“The move is one of a number of changes APRA introduced in response to lessons from last year’s overseas banking turmoil where several US and European banks either failed or required rescue, and where Government intervention was required to restore stability and minimise the risk of contagion,” APRA said in a statement.
A high profile example were the hybrid bonds issued by Credit Suisse, which were designed to protect it in a crisis, but which had to be massively written down when it was rescued from collapse by fellow Swiss bank UBS last year.
Although these bonds were popular with retail investors in Australia because of their high yields and with capital-constrained smaller banks, APRA said it took this step only after extensive consultation and careful consideration of the potential options.
APRA received 23 written submissions and talked with stakeholders including banks, industry associations, rating agencies, brokers, investors and other regulators.
“Feedback was generally supportive of APRA’s proposal, with most respondents agreeing that AT1 does not meet the regulatory objectives of stabilising a bank experiencing financial stress or supporting resolution to prevent a disorderly failure,” it said.
APRA Chair John Lonsdale said the purpose of the announcement was to provide certainty to industry so banks and other stakeholders could start preparing for the transition.
“By replacing AT1 with forms of capital that are more reliable in a stress situation, Australia’s banks will be even better equipped to respond to a future crisis, minimising the potential need for taxpayer support,” Lonsdale said in the statement.