APRA goes with vibe to phase out hybrid bonds

The Australian Prudential Regulation Authority (APRA) has moved to go with what it sees as general industry support and will phase out hybrid bonds.

The regulator said it had consulted thoroughly on the policy move, with 23 written submissions and discussions with various stakeholders with the result being “generally supportive” of the phase out with the so-called Tier 1 (AT1) capital instruments not meeting regulatory objectives.

APRA acknowledged that some submissions did raise concerns with phasing out AT1, noting a range of impacts including investors losing access to AT1 as an investable product.

“APRA acknowledges these concerns but remains of the view that AT1 does not do effectively what it is intended to do: absorb losses while the bank is a going concern and support resolution,” it said.

“An effective regulatory framework in a crisis is important to safeguard the interests of depositors, limit risks to financial stability, and avoid the need for taxpayer funded support.”

“As a result, APRA has today written to banks confirming it would proceed with plans to phase out AT1, while laying out a timeline for transitioning to the updated framework over the next eight years. “

Commenting on the move, APRA chair, John Lonsdale said the purpose of the regulator’s move was to provide certainty to industry so the banks and other stakeholders could start preparing for the transition.

“Capital is the cornerstone of the banking system’s ability to withstand financial stress. While Australia’s banks are unquestionably strong, overseas experience has shown AT1 doesn’t operate as intended during a crisis due to the complexity of using it, the potential for legal challenges and the risk of causing contagion.

“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.

“There will be no overall increase in capital requirements for banks, and we expect funding costs under the new framework will be neutral to marginally higher for the five largest banks and slightly lower for all other banks,” Lonsdale said.