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APRA to phase out Credit Suisse bond trade

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About $US17 billion ($25.5b) of the securities were wiped when UBS Group AG rescued Credit Suisse in March 2023. 
Camera IconAbout $US17 billion ($25.5b) of the securities were wiped when UBS Group AG rescued Credit Suisse in March 2023.  Credit: Arnd Wiegmann/Getty Images

Australia’s banking regulator has proposed lenders scrap the use of AT1 bonds in capital requirements, potentially becoming the first jurisdiction to phase out the securities that were wiped out after Credit Suisse’s collapse last year.

Replacing additional tier 1 bonds with existing, more reliable securities would simplify and improve the effectiveness of bank capital in a crisis, the Australian Prudential Regulation Authority said.

AT1 bonds were introduced after the global financial crisis to prevent taxpayers from shouldering the burden for a bank’s failure. They are the lowest rung of bank debt, producing healthy returns in good times. But they became controversial after $US17 billion ($25.5b) of the securities were completely written off when UBS Group AG rescued Credit Suisse in March 2023.

APRA Chair John Lonsdale said AT1 bonds don’t fulfill the function of stabilising a bank during periods of stress due to their complexity, the potential for legal challenges and the risk of contagion. In Australia, those risks are heightened because an “unusually high proportion” of the notes are held by retail investors, he said.

“The proposed changes seek to support financial system stability at times of crisis with simpler and more certain resolution of banks in the unlikely event of failure,” APRA said. “They are also aimed at reinforcing confidence in the safety of deposits at times of stress.”

Australia’s big four banks have about A$39 billion ($26 billion) in combined AT1 issuance, according to Bloomberg Intelligence. Replacing additional tier 1 bonds with existing, more reliable securities would simplify and improve the effectiveness of bank capital in a crisis, the Australian Prudential Regulation Authority said.

AT1 bonds were introduced after the global financial crisis to prevent taxpayers from shouldering the burden for a bank’s failure. They are the lowest rung of bank debt, producing healthy returns in good times. But they became controversial after $US17 billion ($25.5b) of the securities were completely written off when UBS Group AG rescued Credit Suisse in March 2023.

APRA Chair John Lonsdale said AT1 bonds don’t fulfill the function of stabilising a bank during periods of stress due to their complexity, the potential for legal challenges and the risk of contagion. In Australia, those risks are heightened because an “unusually high proportion” of the notes are held by retail investors, he said.

“The proposed changes seek to support financial system stability at times of crisis with simpler and more certain resolution of banks in the unlikely event of failure,” APRA said. “They are also aimed at reinforcing confidence in the safety of deposits at times of stress.”

Australia’s big four banks have about A$39 billion ($26 billion) in combined AT1 issuance, according to Bloomberg Intelligence.

Bloomberg.

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