Australia’s financial regulator, APRA, is set to become the first in the world to phase out banks’ use of Additional Tier 1 (AT1) capital instruments, often called contingent convertible securities or “CoCos.” The decision follows a review triggered by the controversial $17 billion wipeout of AT1 bonds during Credit Suisse’s rescue in 2023.
The Australian Prudential Regulation Authority announced Monday that it will replace AT1 instruments with more reliable forms of capital, aiming for improved loss absorption during financial stress. APRA plans to finalize the changes by the end of 2024, with the new framework effective from January 2027.
AT1 bonds, introduced after the global financial crisis, are designed to convert into shares or be written off during bank failures. However, APRA stated that these instruments do not meet their intended objectives of stabilizing banks in distress. The regulator highlighted that Australian banks, with a market worth A$40 billion ($26 billion) in AT1s, will transition to a mix of simpler Tier 2 bonds and common equity Tier 1 capital.
Despite offering high yields, AT1 bonds have faced criticism for their backward-looking trigger mechanisms and ineffectiveness in resolution scenarios. While some investors expressed concerns about losing access to AT1 products, APRA maintains that the phase-out will simplify bank capital structures and enhance stability.
Global regulators are unlikely to follow Australia’s lead, analysts say, due to tighter restrictions on retail access to AT1s in other markets.