April 14, 2024

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Australia Considers AT1 Bond Reform to Strengthen Financial Sector

2 min read

(Bloomberg) — Australia’s banking regulator is looking at how to improve Additional Tier 1 bonds, saying this year’s international banking crisis showed they only soak up losses at a “very late stage.” 

Some design features, as well as the fact that a large proportion are held by retail investors, could “potentially undermine” the effectiveness of AT1s in Australia, officials said in a statement on Thursday. They also published a discussion paper detailing possible solutions. 

A legacy of the global financial crisis, AT1s are the lowest rung of bank debt, producing juicy returns in good times but taking a hit when a bank runs into trouble. They grabbed the spotlight in March when an emergency rescue of Credit Suisse by UBS Group AG pulled the pin on about 16 billion francs of the notes, provoking investor fury and legal action. 

“Australia’s banking system is one of the strongest and most resilient in the world, but we need to stay alert to potential risks to that stability,” Therese McCarthy Hockey, executive board member at the Australian Prudential Regulation Authority, said.  

Here are some policy options suggested by the regulator: 

  • Raise or redefine the loss absorption trigger level, allowing the notes to be used earlier. Widen the definition of the trigger so it’s based on forward-looking metrics
  • Impose an upper limit on the amount of capital that’s eligible to be counted as AT1s
  • Restrict retail ownership, thereby reducing financial system contagion risks

Officials will hold talks with the financial sector this year and plan a formal consultation on proposed changes next year. 

 

©2023 Bloomberg L.P.


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