Sept 10 (Askume) – Australia’s prudential regulator has proposed banning the issuance of certain hybrid securities from 2027 to help banks meet their capital requirements, as retail investors who normally buy these securities are increasingly unwilling to take on the risk of purchasing these instruments.
The Australian Prudential Regulation Authority (APRA) said on Tuesday it wants banks to replace redundant Tier 1 instruments with more reliable and cheaper capital to improve capital efficiency during the crisis.
Switzerland’s financial regulator cancelled Credit Suisse’s $17.24 billion of additional tier one capital last year to save the bank from merging with UBS Group AG, angering bondholders.
According to a discussion paper on APRA’s website , Australian banks will have about A$40 billion ($26.66 billion) of additional Tier 1 capital outstanding by June 2023.
“This would be a significant change to the bank’s capital structure,” an Australian Banking Association spokesman said.
“Banks will now carefully consider the impact of APRA’s proposals, any changes in the cost of capital and the impact on capital markets and investors.”
The transition period will begin on January 1, 2027, and all hybrid vehicles must be replaced by 2032.
Citi analysts said: “We believe this will have the greatest impact on investors holding hybrid securities, who will gradually have to allocate capital elsewhere.” They added that hybrid securities are generally held by retail investors in Australia, while those in Australia overseas are held by institutional investors.
Insurance companies will be allowed to issue hybrid securities.
Christopher Joy, portfolio manager and chief investment officer at Coolabah Capital, said: “This proposal from the banking regulator is surprising but sensible and will protect insurance hybrid securities.”
(USD 1 = AUD 1.5002)
