Bank Hybrids to be phased out to ensure financial stability

What used to be a reliable source of income for investors will no longer be an option due to the Australian Prudential Regulation Authority (APRA) deeming them not risky enough. As a result, they have called time on bank hybrids.

Bank hybrids were a product that were introduced in the early 90’s as a way for large banks to boost their capital. The money invested helped a bank fund its activities like lending to households and businesses.

Quite complex in their make-up, they were marketed as a regular and higher income stream for investors… and a way for them to diversify their investments. They were also appealing as they were able to be traded on the ASX and generally paid higher rates of interest or distributions than regular bank deposits (savings accounts and term deposits).

However, they have carried a number of risks for investors, namely returns hinging on the success on how well a bank was performing. Moreover, since the distributions were pre-determined, investors did not benefit from any increase in profits.

Additionally, if the issuing bank was in financial difficulty, investors ran the risk of losing some or all of their investments as their bank hybrids were converted into Ordinary Shares.

APRA wanted to create an opportunity to simplify banks capital structures, and the regulatory body said hybrids would be replaced with more reliable and less expensive forms of capital to improve the effectiveness of bank capital in times of crisis.

Transition is to begin from January 2027 and by 2032 all $43 billion of bank hybrids on issue will be repaid.

For those who hold these products please feel free to reach out to review their place in your portfolio and options around alternatives.

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