Australia’s planned AT1 phase out to have little impact on banks

If pushed through, the CET1 minimum requirement will rise to 10.50%.

Australia’s proposal to phase out the use of Additional Tier 1 (AT1) instruments will have little impact on local banks, according to Fitch Ratings.

The Australian Prudential Regulation Authority (APRA) proposed to scrap the use of AT1 as capital requirements on 10 September 2024. APRA plans to implement the changes from 2027, with existing AT1 instruments counting as Tier 2 until the first call date, the latest of which is in 2032.

If pushed through, it will move the Common Equity Tier 1 (CET1) minimum requirement from 10.25% to 10.50%, with banks likely to revise up their target capital levels by a similar amount.

This impact is “limited”, Fitch Ratings said in a commentary.

It is also not expected to have any impact on the CET1 requirements for standardised banks, nor total capital requirements of any bank.

“We also do not expect the modest 25bp reduction in the minimum amount of qualifying junior debt instruments, which Australia’s five largest banks are likely to use to meet minimum loss absorbing capacity requirement,” the ratings agency said.

APRA’s proposed changes aim to address the ineffectiveness of AT1 instruments in absorbing losses on a going concern basis in recent international examples. In 2023, UBS had opted to wipe out $17.1b of AT1 debt held by Credit Suisse after its abrupt takeover of the bank.
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