Australia to phase out AT1 bonds for bank capital after Credit Suisse wipeout

AUSTRALIA’S banking regulator has proposed lenders phase out the use of additional tier 1 (AT1) bonds – the kind of securities that were wiped out after Credit Suisse Group’s collapse – to strengthen their capital holdings in the event of a crisis.

“The proposed changes seek to support financial system stability at times of crisis with simpler and more certain resolution of banks in the unlikely event of failure,” the Australian Prudential Regulation Authority (APRA) said on Tuesday (Sep 10). “They are also aimed at reinforcing confidence in the safety of deposits at times of stress.”

Under APRA’s proposal, the transition will start from Jan 1, 2027, with all current AT1 bonds on issue expected to be replaced by 2032. The banking regulator began examining the securities known as AT1 bonds in September last year.

The proposed changes “draw on the lessons of last year’s global banking turmoil where several US and European banks either failed or needed to be resolved in short succession, with a number of governments having to intervene to minimise the risk of contagion and financial system instability”, APRA said.

In the most high profile case, about US$17 billion of the securities were completely written off when UBS Group rescued Credit Suisse in a Swiss government-brokered deal aimed at containing a crisis of confidence that threatened to spread across global financial markets. BLOOMBERG