APRA Finalises Plan to Phase Out AT1 Capital Instruments, Sets Leverage Ratio at 3.25%

The Australian Prudential Regulation Authority (APRA) has confirmed final amendments to its bank prudential framework as it moves ahead with plans to phase out Additional Tier 1 (AT1) capital instruments—commonly known as hybrid bonds—as eligible regulatory capital.

The regulator reiterated that AT1 instruments will be gradually removed from the system, with a full phase-out expected by 2032. Existing instruments will retain their current legal terms, including subordination, throughout the transition. According to APRA, the change aims to create a “simpler and more reliable capital framework” by allowing banks to replace AT1 with more robust and cost-effective forms of capital.

APRA highlighted several expected benefits, including improved crisis stabilisation, reduced contagion risk, enhanced proportionality for smaller banks, and lower compliance burdens. The regulator noted that international experience has shown AT1 capital may not function effectively in stabilising markets during periods of stress.

A key adjustment from the initial proposal involves the leverage ratio requirement. APRA will set the leverage ratio at 3.25% of Common Equity Tier 1 (CET1) capital, rather than the previously proposed 3.5%, following industry feedback. This change is intended to maintain the current calibration of the leverage ratio.

APRA Member Therese McCarthy Hockey said the shift to simpler capital instruments will strengthen the resilience of the financial system:
“By phasing out AT1 as eligible bank capital and replacing it with simpler and more effective regulatory capital instruments, the Australian financial system will be more resilient and better able to withstand future shocks.”
She added that APRA will continue working with the industry to ensure a smooth transition ahead of the framework’s implementation on 1 January 2027.