APRA sounds alarm on retail obsession with bank hybrids
The prudential regulator is worried the high ownership of bank hybrids by Australian retail investors means faith in the financial system could be undermined, rather than protected, in the event the securities are written down.
The Credit Suisse AT1 wipeout fixed attention on hybrid complacency in Australia. Bloomberg
The Australian Prudential Regulation Authority is seeking feedback from the industry after issuing a discussion paper on Thursday exploring “options to improve the effectiveness” of hybrids. APRA fears hybrids may not work as designed in a crisis, where their function is to spare depositors from losses at the expense of the hybrid investor.
Hybrids, also known as additional tier one or AT1 securities, are mainly issued by banks and insurers, forming part of their regulatory capital. They are debt-like in that they pay attractive income, but are equity-like in that they can be written-off or converted to shares in extreme scenarios.
APRA is “concerned that AT1 capital instruments would not operate as originally intended due to certain design features and market practices,” it said on Thursday. “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,” executive director Therese McCarthy Hockey said in a statement.
“APRA wants to start exploring how we can make sure this form of capital functions as intended should it be required,” she added.
The APRA statement comes after it fired a warning shot about investor and issuer complacency over bank tier two bonds.
The role of hybrids has become a global focus since Credit Suisse’s AT1 investors were wiped out when the bank was forced into a shotgun merger with UBS.
APRA’s
Read more on afr.com
