APRA Finalises AT1 Phase-out And Proposes New Three-tier Prudential Framework

The Australian Prudential Regulation Authority (APRA) has announced two significant developments in its regulatory policy this month that together signal a shift towards a more proportionate, streamlined and resilient prudential framework.

First, APRA has announced that it has finalised a set of amendments to its prudential standards, prudential practice guides and reporting standards, which together will remove Additional Tier 1 capital (AT1) from bank prudential and reporting frameworks. AT1's role as a loss-absorbing buffer will largely be replaced by Common Equity Tier 1 Capital (CET1) and Tier 2 Capital (Tier 2). The final amendments reflect industry feedback following a consultation period, as well as APRA's own revisions. The amendments will commence on 1 January 2027, and APRA expects banks to be compliant with the updated reporting requirements for the March 2027 quarter reporting period.

Secondly, APRA has launched a consultation process to formalise a new three-tier proportionality framework for regulating banks. This is aimed at supporting competition and reducing unnecessary regulatory burden by providing clearer distinctions between large, medium and small institutions. A new top tier, known as 'Most Significant Financial Institutions', would cover banks with assets above A$300bn, while thresholds for existing tiers would also be updated. Final policy settings are expected in 2026 following the three-month consultation period.

These developments reflect APRA's broader agenda of recalibrating regulatory settings to improve clarity, enhance proportionality, and ensure resilience. Both initiatives will have meaningful implications for banks' compliance strategies, capital planning, and operational readiness over the coming years.

1. Finalising the removal of AT1: A simpler and more robust capital framework

On 4 December, APRA announced it had finalised amendments to its prudential standards and guidance to effect the removal of AT1 from its bank prudential and reporting frameworks for authorised deposit-taking institutions (ADIs).

APRA's intention to transition away from AT1 was announced in December 2024, itself in response to international bank failures in 2023. These failures highlighted certain insufficiencies of AT1 as going concern capital.

By removing AT1, APRA is seeking to improve capital effectiveness in crises, reduce compliance costs for banks and enhance proportionality.

APRA has made some adjustments to the amendments initially proposed in July 2025 to reflect both industry feedback and APRA's own revisions. Many of the industry submissions APRA received during the consultation period focused on the downstream consequences of removing AT1, particularly on leverage ratio settings and large exposure limits. In response, APRA made several noteworthy adjustments:

• Lowering the leverage ratio requirement: APRA reduced the minimum leverage ratio requirement from 3.5% to 3.25% (measured on a CET1 basis), with the aim of avoiding unintended tightening of capital requirements as AT1 is phased out while still maintaining a robust backstop to risk-based capital measures.
• Alignment with international frameworks: APRA chose to maintain CET1-based large exposure limits to remain compliant with Basel standards, despite industry requests for increased limits or narrower definitions.
• Preserving flexibility in capital instruments: APRA reversed an earlier proposal and will continue to allow optionality between conversion and write-off for Tier 2 instruments (particularly important for banks with cross-border structures).
• Clarifying treatment of internal issuances and transitional instruments: the updated APS 111 and related standards clarify the treatment of internal Tier 2 and Total Loss-Absorbing Capacity issuances, address the handling of transitional AT1 during the phase-out and make drafting refinements to ensure consistency across the prudential framework.

2. A more proportionate prudential framework: APRA's proposed three-tier model

On 5 December, APRA published a discussion paper outlining its plans to introduce a clearer three-tier structure to increase proportionality within the banking prudential framework.

APRA believes that adding a third tier will help to reduce the administrative burden on small and medium banks, thereby enhancing competition and promoting financial stability while still protecting depositors.

Tiers proportionate to systemic impact

APRA's proposed three-tiered prudential model represents an important development in its supervisory philosophy. The existing framework classifies financial institutions as either 'Significant Financial Institutions' (SFIs) or 'Non-Significant Financial Institutions' (NSFIs). Under the proposed model, a new top tier 'Most Significant Financial Institutions' (MSFIs) would be introduced for banks with over A$300bn in assets, which would initially comprise ANZ, CBA, NAB, Westpac and Macquarie Bank.

The second tier would include all other SFIs, with the SFI threshold being raised from A$20bn in assets to A$30bn. APRA considers increasing the SFI threshold to be appropriate given inflation has eroded the real value of the threshold since being introduced and the banking system has grown around 7% over the same period.

NSFIs would remain in a third tier and would be given additional time to comply with any new or revised requirements where appropriate compared to banks in other tiers, with the exact periods granted varying depending on factors such as the type and complexity of requirements and the materiality of the relevant risks. APRA hopes that this would relieve the regulatory burden on NSFIs and provide the opportunity to learn from the experiences of larger ADIs.

The revised structure would operate as follows:

The intent behind APRA's proposed three-tier model is to ensure that regulatory effort is proportionate to systemic impact.

Transitional arrangements

APRA proposes to provide all banks which move to a higher regulatory tier with a minimum 12-month grace period before higher prudential settings apply, regardless of whether the move was the result of organic growth, merger or acquisition. APRA will consider granting extensions to that period, for example to allow for smooth execution of a logistically challenging merger, or where a particular standard requires a significant uplift in an entity's capability.

Notably, several entities which are currently SFIs would fall below the new proposed threshold for SFIs under the new structure. APRA intends to assess these ADIs on a case-by-case basis to determine whether they should retain SFI status based on factors such as complexity and group structure.

Consultation questions

The discussion paper includes two consultation questions which APRA seeks feedback on:

• Are the proposed asset thresholds for MSFIs and SFIs appropriate? If not, where should they be and why?
• Are there any other ways APRA can support effective policy implementation or transition across tiers?

Looking ahead

These two APRA announcements, though separate, are united by a common theme: reshaping the prudential framework to be clearer, more proportionate and more resilient. The removal of AT1 redefines how banks will be capitalised and the proposed tiering framework redefines how they will be classified and supervised.

Finalising the removal of AT1

APRA's new prudential standards and guidance codifying its removal of AT1 will commence on 1 January 2027. All ADIs must prepare for this change as a priority, as APRA expects banks to be compliant with the updated reporting requirements for the March 2027 quarter reporting period. Banks will need to review their capital tranches, amendment processes and investor communication strategies as these changes move into effect.

Proposed three-tier model

APRA has stated that the three-tiered proportionality system is part of a broader push to remove unnecessary burden and support national productivity. The proposed three-tiered model, together with other planned changes such as simplifying the ADI licensing regime and working closely with Treasury on a possible fourth tier of regulation for the smallest ADIs, signals that proportionality will remain a central theme in future reforms.

For banks, the practical implications will include recalibrating internal compliance models, aligning governance structures with the expectations of their designated tier and reviewing investment cycles to match implementation timelines that may now be more flexible for smaller entities.

Written submissions to APRA's discussion paper regarding the proposed three-tier model are due by 27 February 2026. APRA expects to finalise the proposal based on the feedback received in 2026, and subsequently to consider whether additional proportionality may benefit the insurance and superannuation sectors.

Stakeholders should consider engaging with the consultation process, especially in relation to the two consultation questions above.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.