CREDIT UPDATE: Australian Bank Regulator Propose Replacing AT1 Securities

APRA has proposed a significant shift in Australia's banking capital framework, aiming to phase out AT1 hybrid instruments by 2032 and replace them with Tier 2 (T2) and CET1 capital. This change intends to simplify the system by providing banks with "cheaper and more reliable forms of capital" that better absorb losses in times of stress. Large banks will replace 1.5% of AT1 with 1.25% T2 and 0.25% CET1, while smaller banks will fully replace AT1 with T2. The proposal, stemming from concerns about the complex and limited functionality of AT1 instruments in crisis situations, reflects lessons learned from recent US banking failures. If implemented, this could improve market efficiency, but may raise the risk and yields of newly-issued T2 bonds.

APRA link -https://www.apra.gov.au/news-and-publications/apra-proposes-update-to-bank-capital-framework-to-strengthen-crisis