| Leverage ratio | - Submissions suggested APRA decrease the minimum leverage ratio requirement from 3.5 per cent to 3 per cent, given it is now being measured on a more conservative CET1 basis.
- Additionally, this would remain more conservative than the 3 per cent requirement in the Basel Committee on Banking Supervision’s (Basel Committee) framework given the CET1, rather than Tier 1, measurement.
- Submissions were also concerned that the proposal could lead to the leverage ratio being the driver of lending decisions, rather than the risk-based capital framework.
| - The leverage ratio requirement remains an important tool to limit the build-up of excessive leverage in the banking system and for market participants to understand leverage trends that can be distorted by risk-based measures. APRA considers that a lower 3 per cent leverage ratio requirement would unlikely fulfill its role as a backstop to the risk-based capital framework.
- APRA is therefore decreasing the minimum leverage ratio requirement from the originally proposed 3.5 per cent to 3.25 per cent, measured using CET1. APRA considers that this approach best continues to discourage excessive leverage while reducing some of the unintended tightening in the leverage ratio requirement caused by the removal of AT1. It also better maintains the existing leverage ratio requirement that is measured on a Tier 1 Capital basis.
- APRA does not expect this change to increase leverage in the system, as while the headline requirement is lower, it is now being measured on a more conservative CET1 basis.
- In the case of excessive leverage arising at an individual bank, this could also be addressed via APRA’s existing power to vary the minimum leverage ratio requirement for individual banks.2
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| Large exposure limits | - Submissions suggested increasing the large exposure limits. This is because large exposures limits will now be measured on a more conservative CET1 basis.
- APRA also received feedback on narrowing the large exposure definition to exclude certain exposure types from the limits. Submissions suggested this would better align with the Basel framework.
| - APRA is proceeding with its proposal to retain the existing large exposure limits measured on a CET1 basis. This is to ensure that APRA’s requirements are strictly compliant with the Basel Committee’s large exposures framework.
- Narrowing the large exposure definition would require a structural change to APRA’s large exposure framework. This change is unrelated to the consequential amendments required to remove AT1 from the prudential framework and would require a separate targeted consultation. APRA is therefore retaining the existing large exposure definition at this stage.
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| Conversion and write-off | - Submissions suggested that APRA should retain the optionality to issue both conversion and write-off Tier 2. This would provide flexibility, especially if needing to resolve overseas subsidiaries that issue Tier 2 write-off.
| - APRA is reverting to the existing approach, retaining the optionality in APS 111 to issue both conversion and write-off Tier 2.
- While requiring conversion instruments would provide some additional certainty to the treatment of Tier 2 during resolution, APRA recognises the benefits from optionality and flexibility within the prudential framework.
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| Holdings of AT1 issued by other financial institutions | - Submissions requested an exemption for deducting AT1 issued by other financial institutions from CET1 where a bank holds AT1 in the trading book for the purposes of providing market liquidity.
- Submissions also requested an exemption where the gross long position of all AT1 does not exceed 5 per cent of the trading bank’s own CET1, with a 30 day maximum holding period.
| - APRA has adjusted APS 111 to allow for entities to deduct AT1 in the trading book from Tier 2, up to a 0.25 per cent of CET1 threshold. Above this threshold or beyond a 30-day maximum holding period, an entity must deduct from CET1.
- While industry proposed a higher 5 per cent threshold, APRA considers a lower threshold as sufficient to meet the purpose of providing market liquidity. It remains appropriate more broadly for AT1 to be deducted from CET1.
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| Holdings of Tier 2 and LAC issued by New Zealand subsidiaries | - Submissions sought clarification on the treatment of Tier 2 and LAC issued internally by an overseas subsidiary to its Australian parent entity, particularly in light of the Reserve Bank of New Zealand’s (RBNZ) consultation on their capital settings.3
| - APRA has clarified in APS 111 that internally issued Tier 2 and LAC are subject to the corresponding deduction approach provided they meet any of the following:
- the criteria for Tier 2 under APS 111;
- the criteria for TLAC as stated in the Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution issued by the Financial Stability Board on 9 November 2015; or
- the Basel Framework requirements for Tier 2.
- Tier 2 instruments issued under existing RBNZ regulations must continue to be deducted from CET1.
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| Trans-Tasman funding arrangements | - Submissions requested APRA clarifies its supervision of Trans-Tasman funding arrangements, considering the RBNZ’s consultation.
- This included ensuring that concessions or adjustments to funding arrangements be applied uniformly across industry, rather than negotiated bilaterally.
| - APRA does not intend to additionally restrict Trans-Tasman funding arrangements following the removal of AT1. APRA also intends to apply a uniform approach across impacted entities.
- APRA will discuss the specific arrangements with impacted entities after the RBNZ has finalised its consultation.
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| Loss absorbing capacity (LAC) amortisation | - Submissions provided suggestions to change APRA’s existing LAC requirements. This included, for example, expanding the eligible sources of LAC and amending the amortisation requirements for Tier 2 that are issued to meet LAC requirements.
| - APRA’s LAC framework has been developed following significant consultation and industry engagement. APRA is not amending its LAC framework at this time.
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| Related entity limits | - One submission requested APRA recalibrate related entity limits.
- One submission noted the proposed increase in conservatism in related entity limits could be accommodated.
| - APRA is proceeding with its proposal to measure related entity exposures on a CET1 basis, with no change to the underlying limits.
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| Subordinated Tier 2 | - APRA did not receive any feedback on its proposed clarification to preclude the issuing of ‘subordinated’ Tier 2.
| - APRA is proceeding with its proposed edits to preclude the issuing of ‘subordinated’ Tier 2.
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| Mandatory or investor conversion after first call date | - APRA did not receive any feedback on its proposal to remove the provision that a call option combined with a provision to convert into ordinary shares does not constitute an incentive to redeem, provided conversion is at least two years after the first call option date.
| - APRA is proceeding with its proposal to remove this provision.
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| Regulatory calls | - One submission requested that APRA allow the exercise of regulatory call options for transitional AT1 prior to the first call option date. This would provide greater flexibility to manage the timing and cost of issuing replacement Tier 2.
| - Consistent with APRA’s 2024 Discussion Paper, to maintain an orderly transition, APRA would not expect to approve regulatory calls of Transitional AT1 at an earlier date than the first call option date.4
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| Drafting suggestions | Submissions included the following drafting suggestions: | - |
- Retain the centralised definition of ‘Additional Tier 1 Capital’.
| - APRA has retained a centralised definition of ‘Additional Tier 1 Capital’ within Prudential Standard CPS 001 Defined terms, which refers to the definition of ‘Transitional Additional Tier 1 Capital Instruments’ set out in APS 111.
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- Clarify the scope of instruments eligible for transition arrangements.
| - APRA has amended Attachment H to APS 111 to clarify the scope of the transition arrangements.
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- Clarify whether Transitional AT1 should be captured within the interest rate risk in the banking book capital calculation.
| - APRA has amended Prudential Standard APS 117 Capital Adequacy: Interest Rate Risk in the Banking Book to clarify that Transitional Additional Tier 1 Capital Instruments should be included in the interest rate in the banking book capital calculation.
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- Allow banks to modify relevant disclosure templates to not make disclosure relating to Tier 1, rather than duplicating disclosures using CET1.
| - APRA has amended Prudential Standard APS 330 Public Disclosure to allow banks to modify relevant disclosure templates to avoid duplicative disclosures.
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- Clarify the treatment of Transitional AT1 within the net stable funding ratio calculation.
| - APRA has amended APS 111 to clarify that Transitional Additional Tier 1 Capital Instruments should be included in Total Capital, rather than be considered as Tier 2 Capital. This amendment addresses unintended impacts in other areas of the prudential framework.
- APRA is not proposing any amendments to Prudential Standard APS 210 Liquidity as this standard only refers to Tier 2 Capital instruments as defined in APS 111, which will not include Transitional Additional Tier 1 Capital Instruments.
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- Clarify the risk weights for lease exposures that relate to the portion of aggregate residual value compared to Tier 1 Capital. These references are in both Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Capital and Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Capital.
| - APRA intends to retain the existing requirements in APS 112 and APS 113 but measured on a CET1 basis. APRA will formally consult on these amendments as part of APRA’s 2026 minor updates process.5
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