On 4 December, the Australian Prudential Regulation Authority (APRA) released a letter that responds to submissions to its consultation on amendments to its prudential and reporting frameworks to facilitate the phase out of Additional Tier 1 (AT1) capital instruments – also known as hybrid bonds – as eligible regulatory capital for authorised deposit-taking institutions.

The letter also details the key changes to APRA’s prudential standards, reporting standards and prudential practice guides that the regulator has made in response to feedback to its earlier consultation issued in July.

Key changes

In response to industry feedback to its consultation APRA has made the following key changes:

  • The minimum leverage ratio requirement is reduced from 3.5 per cent to 3.25 per cent, measured on a Common Equity Tier 1 capital basis.  APRA has made this decision to avoid consequential tightening of the minimum leverage ratio.
  • APRA has clarified its policy intent in Prudential Standard APS 111 Capital Adequacy: Measurement of Capital that requires eligible Tier 2 capital or Total Loss Absorbing Capacity instruments issued by an overseas subsidiary internally to its Australian parent entity to be deducted from the parent entity’s Tier 2.  This amendment is consistent with APRA’s existing policy position in this area.

Next steps

The new prudential standards and guidance will come into effect on 1 January 2027.

APRA expects banks to be compliant with the updated reporting requirements for the March 2027 quarter reporting period.