Australia looking to tap potential of AT1 bonds

This exploration will alleviate any potential risks that may dawn the banking sector.

The Australian Prudential Regulation Authority (APRA) has been studying ways to “improve the effectiveness of Additional Tier 1 (AT1) capital instruments” in case of a bank’s downfall.

APRA Executive Board Member Therese McCarthy Hockey expressed concerns that certain design elements and market practices might hinder AT1 capital instruments from functioning as originally intended.

“Australia’s banking system is one of the strongest and most resilient in the world, but we need to stay alert to potential risks to that stability,” Hockey said.

AT1 instruments are pivotal in absorbing losses to stabilise a bank before a crisis escalates or assisting in the resolution phase. However, recent global banking stress incidents revealed that AT1 primarily absorbs losses in the late resolution stage.

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"Given the Australian banking sector’s reliance on AT1 – and noting how rapidly contagion spread across international banks earlier this year – APRA wants to start exploring how we can make sure this form of capital functions as intended should it be required," Hockey added.

Considering Australia's reliance on AT1 and the rapid spread of contagion among international banks, APRA aims to ensure this capital type functions as intended when necessary.

In a discussion paper released, APRA highlights challenges of using AT1 in Australia and seeks feedback on potential solutions. APRA plans to engage with industry stakeholders to explore these options further this year and, following feedback consideration, formally consult on proposed prudential standard or guidance changes next year.