On 8 July 2025, the Australian Prudential Regulation Authority (APRA) released a consultation paper on implementing APRA’s decision to phase out Additional Tier 1 (AT1) capital instruments.

Background

APRA is seeking feedback on proposed amendments that give effect to the phase out of AT1 capital instruments and replace them with predominantly cheaper and more reliable forms of capital that would absorb losses more effectively in times of stress. APRA is not seeking feedback on the decision to phase out AT1, with APRA having confirmed this decision in December 2024. Rather APRA is consulting on technical amendments to its bank prudential framework as regards the effect, and impacts stemming from, the removal of AT1. This requires amending seven prudential standards, three reporting standards, and three prudential practice guides.

Proposals

APRA’s proposed amendments embed the key elements in APRA’s December 2024 decision:

  • Removal of AT1 from the minimum capital requirements for banks, including eliminating the concept of Tier 1 capital and recalibrating Common Equity Tier 1 (CET1) capital and total capital requirements.
  • Transitional arrangements for existing AT1 instruments to be treated as Tier 2 capital until the first call date (2032 at the latest).
  • Other amendments to the framework to remove references to AT1 and Tier 1 requirements.

The consultation paper clarifies APRA’s proposed approach for a range of issues arising from the phase-out of AT1 with the more substantive being:

  • The leverage ratio, and large and related entities exposure limits would remain unchanged, but would be calculated on a CET1 basis, rather than on the basis of Tier 1.  
  • To not allow an additional subordinated tranche of Tier 2, an idea suggested by some industry participants during the previous consultation in 2024.
     
  • To no longer recognise AT1 or AT1-like hybrid capital at a group level for Level 3 banking non-operating holding companies (NOHCs). This will be implemented via amendments to the conditions on relevant NOHC authorities.

Next steps

The deadline for comments on the consultation paper is 5 September 2025.

APRA intends to finalise amendments to its framework before the end of this year, ahead of the new framework coming into effect on 1 January 2027.

APRA expects all AT1 issued by banks to be phased out by 2032.

Preparing

Considering the phase-out of AT1 banks may wish to:

  • Consider their capital models given that APRA proposes replacing the 1.5% AT1 requirement with 0.25% additional CET1 and 1.25% Tier 2 capital.
  • Issue CET1 or Tier 2 instruments to replace maturing AT1 hybrids over the next 7 years. 
  • Consider transition management in the sense that with many AT1 instruments maturing annually, banks will need to align redemptions with capital replacement strategies to avoid funding gaps. Transition plans will also need to be communicated to institutional and retail investors.
  • Update internal models, systems and reporting where relevant and provide staff training where necessary.
  • Revise policies and disclosures where relevant.

We can assist on the above, please feel free to reach out to the authors.