Australia moves ahead to scrap AT1 bonds after Credit Suisse hit
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AT1 bonds were introduced in the aftermath of the global financial crisis to prevent taxpayers from picking up the cost of a bank’s failure.
PHOTO: REUTERS
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SYDNEY – Australia’s banking regulator is pushing ahead to scrap the market for contingent convertible securities, despite some concerns, becoming the first country to phase out the securities that were wiped out after the collapse of Credit Suisse in 2023.
The Australian Prudential Regulation Authority (Apra) said on Dec 9 it will phase out the use of Additional Tier 1 (AT1) bonds with what it noted should be cheaper and more reliable forms of capital that would absorb losses more effectively in times of stress. Apra will finalise changes before the end of 2025, with the updated framework coming into effect from January 2027.
“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,” according to the statement.
ATI bonds were introduced in the aftermath of the global financial crisis to prevent taxpayers from picking up the cost of a bank’s failure. They are the lowest rung of bank debt, producing strong returns in good times.
They became controversial after US$17 billion (S$22.8 billion) of the securities were completely written off when UBS Group rescued Credit Suisse in 2023.
“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.”
The market is worth roughly A$40 billion (S$34 billion). Australia’s big four banks hold AT1 bonds equal to at least 1.5 per cent of their risk-weighted assets. Under the new guidelines, they will be able to replace those bonds with 1.25 per cent tier 2 capital and 0.25 per cent common equity tier 1 capital.
Smaller lenders would be able to fully replace AT1 with tier 2 instruments. BLOOMBERG
