Australian investors will no longer be able to invest in high-yielding, bank-issued hybrids after the key financial regulator, APRA, ruled that they posed a risk to the stability of the Australian financial system and economy.
Banks currently have $41.3 billion in hybrids on issue, which Australian investors have sought for their yields over the years. According to APRA (Australian Prudential Regulation Authority), this popularity presents a potential danger to financial stability.
APRA now intends to phase out bank hybrid securities over the next eight years, requiring banks to replace them with cheaper and more reliable forms of capital.
APRA aims to retire the use of hybrids, or so-called additional tier-one (AT1) securities, to “simplify and improve the effectiveness of bank capital in a crisis.”
APRA says replacing hybrid bonds with cheaper and more reliable forms of capital would enable banks to absorb losses more effectively in times of stress.
Under the proposed changes, large, internationally active banks (CBA, ANZ, Westpac, NAB, and Macquarie) would replace 1.5% AT1 bonds with 1.25% Tier 2 and 0.25% Common Equity Tier 1 (CET1) capital.
Smaller banks would fully replace AT1 bonds with Tier 2, while reducing Tier 1 requirements.
The billions of dollars in ASX-listed hybrids will gradually be replaced by both unlisted and listed, bank-issued Tier 2 subordinated bonds.
The total amount of regulatory capital required would remain unchanged, and banks would remain "unquestionably strong," APRA stated.
This change follows an extensive consultation process that began last September, incorporating feedback from 26 submissions and more than 40 engagements.
It also considered lessons from last year’s global banking turmoil, during which several US regional banks either failed or required rescue in quick succession, with regulators overseeing bailouts or forced liquidations.
By 2032, major banks will have replaced their current hybrid capital, which is worth 2.15% of their risk-weighted assets (or $38.2 billion), with an additional 1.25% of Tier 2 (currently worth $22.2 billion), resulting in a net reduction in regulatory capital supply (or new Tier 2).
According to analysts, investor holdings of current hybrids are 72% larger than the required new issuance of Tier 2.
APRA will consult with the industry until midway through next year, with the phase-out beginning in 2027 and completing by 2032.
There are currently 38 listed hybrids issued by major banks—the big four, as well as Macquarie, Suncorp, Judo Bank, Bank of Queensland, and Bendigo and Adelaide.
Other issuers include the insurer IAG, and financial companies Latitude and Challenger.
