Australia’s AT1 phase out proposal unlikely to be replicated by other regulators

It will wipe out the concentration of AT1 instruments held by domestic retail investors.

The proposal to phase out additional tier 1 (AT1) instruments by Australian regulators is unlikely to be replicated by other regulators, said S&P Global Ratings.

“APRA's proposal is unlikely to be widely replicated. Although loss absorption for bank AT1s before non-viability can be complex in practice, the ambiguities also provide authorities with some flexibility, which would be lost if these instruments are replaced by T2 non deferrable subordinated debt instruments," S&P said in its report.

In Australia, domestic retail investors hold about half of such instruments, a concentration that may prove problematic in the event of a banking crisis, it said.

Earlier in September 2024, the Australian Prudential Regulation Authority (APRA) released a discussion paper that proposes to replace AT1 capital, predominantly with tier 2 (T2) instruments. Both securities can absorb losses when banks are in trouble. 

"The proposed changes are significant," said S&P Global Ratings credit analyst Sharad Jain. "Not for the first time, APRA is potentially taking a different path to global regulators. For example, the major Australian banks have been required to hold a (sizable) Pillar 1 capital charge against interest rate risk in their banking books."

As for reasons to keep AT1 instruments, S&P said that AT1 can play a role in absorbing losses and conserving cash on a going-concern basis.

AT1 instruments can also recapitalize or resolve a bank that is no longer viable.