Aussie prudential regulator intends to replace banks' hybrid capitals

By Rishav Chatterjee

(Reuters) -Australia's prudential regulator proposed to replace bank hybrid bonds with more reliable and less expensive forms of capital on Tuesday, as rising ownership of such securities among retail investors poses a financial stability risk.

The Australian Prudential Regulation Authority (APRA) had been seeking feedback after issuing a discussion paper in September 2023.

The regulator intends to simplify the usage of additional tier-1 (AT1) capital instruments, called hybrid bonds to improve and simplify effectiveness of bank capital in times of crisis, it said in a statement.

The APRA has been ramping up efforts to solidify the Australian financial system, seeking to protect depositor funds, amid rising market worries that hybrids might not be able to protect the country's economic system as they are primarily owned by smaller investors.

"This would represent a significant change to a bank's capital structure," an Australian Banking Association spokesperson told Reuters.

"Banks will now carefully consider the implications of APRA's proposal, balancing any changes to costs of capital, as well as impacts on capital markets and investors."

APRA will, however, keep hybrid securities in place for insurers such as Insurance Australia, Suncorp, QBE and Challenger.

"A surprising yet sensible proposal from the banking regulator, which will keep insurance hybrid securities in place," said Christopher Joye, portfolio manager and chief investment officer at Coolabah Capital.

Of the "Big Four" Australian banks, Commonwealth Bank of Australia and National Australia Bank said they didn't want to comment beyond ABA's remarks, while Westpac and ANZ did not immediately respond to Reuters' request for comments.

The transition period will begin on Jan. 1, 2027 and all hybrids will be replaced by 2032.

Australian banks have boosted their balance sheets by issuing investors hybrid bonds through the exchange. Hybrids are a combination of both equity and debt, but can be converted into shares or written off at a time of financial stress.

(Reporting by Rishav Chatterjee in Bengaluru; Editing by Rashmi Aich)