Banking (prudential standard) determination No. 2 of 2026
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Banking Act 1959, section 11AF
Under subsection 11AF(1) of the Banking Act 1959 (the Act), APRA has the power to determine standards (prudential standards), in writing, in relation to prudential matters to be complied with by authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (authorised NOHCs). Under subsection 11AF(3) of the Act, APRA may, in writing, vary or revoke a prudential standard.
On 8 May 2026, APRA made Banking (prudential standard) determination No. 2 of 2026 (the instrument), which revokes Prudential Standard APS 111 Capital Adequacy: Measurement of Capital made under Banking (prudential standard) determination No. 1 of 2025 and determines a new Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111).
The instrument commences on 1 January 2027.
1. Background
APRA’s mandate is to ensure the safety and soundness of prudentially regulated financial institutions so that they can meet their financial promises to depositors, policyholders, and fund members within a stable, efficient, and competitive financial system.
APRA carries out this mandate through a multi-layered prudential framework that encompasses licensing and supervision of institutions. In the case of the banking industry, APRA is empowered under the Act to issue legally binding prudential standards that set out specific prudential requirements with which ADIs must comply.
APRA regularly reviews its regulatory regime and amends its prudential requirements as a result of a number of factors, including:
- international developments;
- changes in financial market conditions or changes in risk management practices, in response to identified weaknesses in the prudential framework; and
- to reduce potential negative impacts of emerging industry issues.
A key component of APRA’s prudential framework is the suite of prudential standards that impose regulatory capital requirements on ADIs for the purpose of ensuring ADIs hold sufficient capital to address the risks associated with their operations.
As Australia is a member of the Basel Committee on Banking Supervision (BCBS) and the Group of 20, Australia and APRA are committed to meeting internationally agreed standards for prudential regulation for ADIs by implementing capital standards that are based on the framework agreed by the BCBS. One of these capital standards is APS 111.
APS 111 supports Prudential Standard APS 110 Capital Adequacy (APS 110), the latter standard requiring an ADI to maintain required levels of regulatory capital.
2. Purpose and operation of the instrument
The purpose of the instrument is to revoke the existing APS 111 and replace it with a new version of APS 111.
APS 111 sets out the characteristics that an instrument must have to qualify as regulatory capital and the various deductions to be made to determine total regulatory capital on both a Level 1 (ADI) and Level 2 (banking group) basis.
The new APS 111 includes amendments to implement APRA’s decision to phase out Additional Tier 1 (AT1) Capital from the prudential framework, including:
- removal of provisions relating to AT1 Capital eligibility criteria;
- inclusion of a new transitional arrangements attachment;
- amendments to ensure that new issuances of Tier 2 Capital do not include mandatory or investor conversion features (except for at the point of non-viability);
- amendments to clarify that ADIs should deduct holdings of AT1 Capital from other entities from CET1 Capital; and
- general removal of references to AT1 Capital and Tier 1 Capital.
APRA’s decision to remove AT1 Capital is based on the challenges with AT1 Capital meeting its regulatory objectives of stabilising an ADI so that it can continue to operate as a going concern during a period of stress and supporting resolution with the capital strength that is needed to prevent a disorderly failure.
Details of the new prudential standard
See Attachment A.
Documents incorporated by reference
Under paragraph 14(1)(a) of the Legislation Act 2003, the standard incorporates by reference as in force from time to time:
- Acts of Parliament and associated delegated laws;
- Prudential Standards determined by APRA under subsection 11AF(1) of the Act;
- the Australian Accounting Standards determined by the Australian Accounting Standards Board under section 334 of the Corporations Act 2001 (Cth); and
- the Australian Auditing Standards determined by the Auditing and Assurance Standards Board under section 336 of the Corporations Act 2001 (Cth).
These documents may be freely obtained on the Federal Register of Legislation at www.legislation.gov.au (all documents listed above except for Australian Accounting and Auditing Standards), https://www.aasb.gov.au/pronouncements/accounting-standards/ (Australian Accounting Standards) and https://auasb.gov.au/standards-guidance/auasb-standards/auditing-standards/ (Australian Auditing Standards).
Under paragraph 14(1)(b) of the Legislation Act 2003, the standard incorporates by reference as existing at the commencement of the standard:
- Principles on Loss-absorbing and Recapitalisation capacity of G-SIBs in Resolution issued by the Financial Stability Board on 9 November 2015, which may be freely obtained at www.fsb.org/2015/11/total-loss-absorbing-capacity-tlac-principles-and-term-sheet/.
Exercise of discretion by APRA
Under subsection 11AF(2) of the Act, a prudential standard may provide for APRA to exercise powers and discretions under the standard, including (but not limited to) discretions to approve, impose, adjust or exclude specific prudential requirements in relation to one or more specified ADIs or authorised NOHCs.
APRA’s prudential standards include powers that may be exercised by APRA that involve an element of discretion and that may affect the interests of the entities to which the prudential standards apply. These powers include a power to adjust or exclude a provision of the prudential standard.
The need to apply discretion is driven by entity-specific issues and circumstances that are not adequately addressed by the generally applicable provisions of the prudential standards. For example, adjustment or exclusion of a provision may be necessary to obtain a better prudential outcome than would be the case if the prudential requirement were applied unaltered to a particular regulated entity.
When exercising its discretion, APRA considers a wide range of factors, including the considerations set out in the Act and the Australian Prudential Regulation Authority Act 1998.
The exercise of APRA's powers is governed by a robust decision-making framework which is documented in APRA's internal policies. This framework supports APRA in fulfilling its mandate by limiting decision making to those senior APRA officers with the appropriate experience and skill to exercise prudent judgement. The framework also requires decision makers to seek advice from internal technical experts.
The power is also exercised following discussion with the relevant ADI about its appropriateness and the impact it may have on the entity.
Review of decisions
Decisions made by APRA exercising powers in prudential standards are not themselves subject to merits review. This is because these decisions are preliminary decisions that may facilitate or lead to substantive decisions which are subject to merits review.
A breach of a prudential standard is a breach of the Act, as section 11AG of the Act provides that ADIs and authorised NOHCs must comply with applicable prudential standards. However, there are no penalties prescribed for such breaches. Instead, an ADI’s breach of a provision in the Act is grounds for APRA to make further, substantive decisions under the Act in relation to the ADI. Those decisions are:
- to revoke an authority to carry on banking business (section 9A of the Act); and
- to issue a direction to the ADI, including a direction to comply with the whole or part of a prudential standard (section 11CA of the Act).
It is only at this stage that an ADI is exposed to a penalty: loss of its authority under section 9A or 50 penalty units if it breaches the direction (section 11CG of the Act). In nearly all cases[1] the decision is preceded by a full consultation with the ADI to raise any concerns it may have in relation to the decision.
A decision of APRA to impose a direction is subject to merits review under section 11CA of the Act, which is appropriately available at the point where an ADI could be exposed to a penalty.
A decision of APRA to revoke an authority under the Act is subject to merits review, unless either:
- APRA has determined that access to natural justice and merits review is contrary to the national interest or contrary to the interests of depositors with the ADI; or
- the authority is an authority that is to cease to have effect on a day specified in the authority (section 9A(8) of the Act).
3. Consultation
In September 2023, APRA released a discussion paper on the challenges of using AT1 Capital instruments.[2]
Following the release of the September 2023 Discussion Paper, APRA undertook around 40 engagements with a range of external parties and received 26 formal submissions. While responses varied, there was constructive discussion on the challenges with AT1 Capital and on the potential policy options. APRA also discussed the feedback and policy options with other Commonwealth agencies on the Council of Financial Regulators (CFR).
In September 2024, APRA released another discussion paper that outlined potential amendments to APRA’s prudential framework to ensure that the capital strength of the Australian banking system operates more effectively in stress.[3]
In response to the September 2024 discussion paper, APRA received 23 submissions and undertook around 20 engagements with a range of external stakeholders, including ADIs, industry associations, rating agencies, brokers, investors, and peer regulators internationally and domestically.
Stakeholders were generally supportive of APRA’s proposal to simplify the capital framework by primarily replacing AT1 Capital with Tier 2. Stakeholders also welcomed the proportionate approach for smaller ADIs, recognising that the proposal balances simplicity with that of safety and strength.
However, some submissions highlighted the benefits of AT1 Capital and recommended that APRA retain hybrid capital in the bank prudential framework. Submissions noted the benefits associated with the strength and depth of demand for AT1 Capital instruments, and that AT1 Capital provides an investment opportunity and a source of franked distributions for investors.
In December 2024, APRA released a letter to industry providing an update on APRA’s consultation on a more effective capital framework for a crisis.[4] The letter confirmed that APRA is proceeding with its proposal to replace AT1 Capital in the bank prudential framework with more reliable and effective forms of capital.
In July 2025, APRA consulted on amendments to its prudential and reporting frameworks necessary to implement this decision.[5] APRA received five submissions to its July 2025 consultation on amendments to its prudential and reporting frameworks necessary to implement the decision to remove AT1 Capital.
In December 2025, APRA released a letter finalising the removal of Additional Tier 1 Capital.[6] The final amendments reflect both industry feedback and revisions by APRA, with a focus on ensuring existing AT1 Capital continues to operate as intended throughout the transitional period.
All consultations related to the AT1 reforms are available on the APRA website. Non-confidential submissions are also available on APRA’s website.
APRA is satisfied the consultation was appropriate and reasonably practicable.
4. Impact Analysis
The Office of Impact Assessment (OIA) confirmed a Regulatory Impact Statement was not required.
5. Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
A statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is provided at Attachment B to this Explanatory Statement.
ATTACHMENT A
Details of the new prudential standard
Authority and application
Under subsection 11AF(1) of the Act, APRA may determine prudential standards to be complied with by (among others) all, or specified classes of, ADIs and authorised NOHCs.
Paragraphs 1 to 5 are the machinery provisions relating to the legal authority under which the instrument is made, and the classes of ADIs and authorised NOHCs that are required to comply with the standard.
Commencement
Paragraph 6 is a machinery provision relating to the commencement of the standard.
Adjustments and exclusions
Paragraph 7 relies on subsection 11AF(2) of the Act and provides for APRA to adjust or exclude a specific requirement in APS 111 in relation to one or more specified ADIs or authorised NOHCs.
Previous exercise of discretion
Paragraph 8 requires an ADI to contact APRA if it intends to rely on a previous exemption of a prudential requirement, or other exercise of discretion, provided by APRA under a previous version of APS 111.
Interpretation
Paragraph 9 is a machinery provision and notes that terms that are defined in Prudential Standard CPS 001 Defined terms appear in bold the first time they are used in APS 111. This paragraph also notes that a reference to an Act, Regulations, Prudential Standard, Australian Accounting Standard or Australian Auditing and Assurance Standard in APS 111 is a reference to the instrument as in force from time to time.
Definitions
Paragraph 10 is a machinery provision setting out relevant definitions.
Regulatory Capital
Paragraphs 11 to 29 describe each component and category of regulatory capital, and the criteria that must be satisfied to include in total regulatory capital.
These paragraphs also outline the circumstances where APRA may require an ADI to exclude from regulatory capital any item included as a component of capital or reallocate to a lower category of regulatory capital any component of capital.
Further, these paragraphs state a capital instrument is not eligible for inclusion in regulatory capital if it contains any terms that could inhibit the ADI’s ability to be managed in a sound and prudent manner, particularly in times of financial difficulty, or restrict APRA’s ability in its role as prudential regulator to resolve any problems encountered by the ADI.
In addition, these paragraphs outline documentation and consultation requirements associated with the issue of a capital instrument, and APRA’s approval before the terms of an instrument are altered in a way that may affect its eligibility as regulatory capital.
Application of fair values
Paragraph 30 provides that where an ADI measures its financial instruments at fair value for capital adequacy purposes, and where permitted, for other prudential purposes, it must comply with the requirements in Attachment A to APS 111.
Common Equity Tier 1 capital
Paragraphs 31 to 39 outline the characteristics that fully satisfy Common Equity Tier 1 (CET1) capital.
CET1 capital is the highest quality of regulatory capital, as it absorbs losses immediately when they occur.
Tier 2 capital
Paragraphs 40 to 43 outline the characteristics that fully satisfy Tier 2 capital.
Tier 2 capital is gone-concern capital. That is, when an ADI fails, Tier 2 instruments must absorb losses before depositors and general creditors do.
Tier 2 capital issued overseas by ADIs or subsidiaries
Paragraph 44 outlines the circumstances where Tier 2 capital issued overseas by ADIs, or subsidiaries may be recognised in regulatory capital.
Intra-group capital transactions
Paragraphs 45 to 47 outline the matters APRA may consider in assessing whether an item included by an ADI as a component of capital resulting from intra-group transactions is not a genuine contribution to financial strength.
Holding of capital instruments in group members by other group members
Paragraph 48 sets out the circumstances where holdings of capital instruments in group members by other group members may be included in regulatory capital.
Paragraph 49 describes the circumstances where direct investments in shares of an ADI by a special purpose vehicle established under a share-based employee remuneration scheme may be included in the ADI’s CET1 capital.
Paragraph 50 states that a capital instrument must be treated as holdings of own capital instruments and deducted, as appropriate, if requirements in paragraphs 47 and 48 are not met.
Attachment A - Use of Fair Values
Attachment A of APS 111 sets out the requirements for an ADI to measure its financial instruments at fair value for capital adequacy and, where permitted, for other stated prudential purposes referred to in other Prudential Standards.
Attachment B - Criteria for classification as paid-up ordinary shares
Attachment B of APS 111 sets out the criteria for an instrument to be classified as paid-up ordinary shares in CET1 capital.
Attachment C - Minority interest and other capital issued out of fully consolidated subsidiaries that is held by third parties
Attachment C of APS 111 sets out the requirements for minority interest and other capital issued out of fully consolidated subsidiaries that is held by third parties to be included in regulatory capital.
Attachment D - Regulatory adjustments
Attachment D of APS 111 sets out regulatory adjustments (i.e. deductions) from a category of an ADI’s regulatory capital that must be made to determine total regulatory capital.
These deductions typically address the high degree of uncertainty that these items have a positive realisable value in periods of stress and are mostly applied to CET1 capital.
Attachment E – Criteria for inclusion in Tier 2 capital
Attachment E of APS 111 sets out the criteria for an instrument to be included in Tier 2 capital.
Attachment F - Loss absorption at the point of non-viability: Tier 2 Capital instruments
Attachment F of APS 111 sets out requirements that all capital instruments must be able to fully absorb losses at the point of non-viability (PONV).
The PONV condition requires all Tier 2 capital instruments to be capable of being converted into CET1 capital or written off. The trigger for the conversion or write-off is the earlier of: (i) a decision by APRA that the conversion or write-off is necessary, given that the ADI is assessed to be non-viable; and (ii) a decision to inject public funds to prevent the ADI’s failure.
Attachment G - Mutual equity interests
Attachment G of APS 111 sets out the criteria for an instrument to be classified as a Mutual Equity Interest and eligible to be included in CET1 capital. These requirements provide for mutually owned ADIs to issue CET1-eligible capital instruments directly without jeopardising their mutual status.
Attachment H – Transitional arrangements for Additional Tier 1 Capital instruments
Attachment H of APS 111 sets out the transitional arrangements for AT1 Capital instruments issued before 1 January 2027. This includes criteria for such instruments to be eligible to be included in Tier 2 Capital for regulatory capital purposes until their first call option date.
ATTACHMENT B
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Banking (prudential standard) determination No. 2 of 2026
The legislative instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (HRPS Act).
Overview of the Legislative Instrument
The purpose of the legislative instrument is to revoke Prudential Standard APS 111 Capital Adequacy: Measurement of Capital and replace it with a new version of APS 111.
APS 111 sets out the characteristics that an instrument must have to qualify as regulatory capital to be maintained by an authorised deposit-taking institution (ADI) and the various deductions to be made to determine total regulatory capital. ADIs are bodies corporate that have been granted the authority, under the Banking Act 1959, to carry on banking business in Australia.
Human rights implications
APRA has assessed the legislative instrument and is of the view that it does not engage any of the applicable rights or freedoms recognised or declared in the international instruments listed in section 3 of the HRPS Act. Accordingly, in APRA’s assessment, the legislative instrument is compatible with human rights.
Conclusion
The legislative instrument is compatible with human rights as it does not raise any human rights issues.
[1] Subsection 9A(4) of the Act specifically provides that APRA does not need to consult where APRA is satisfied that doing so could result in a delay in revocation that would be:
- contrary to the national interest; or
- contrary to the interests of depositors with the ADI.
[2] APRA Discussion paper ‘Enhancing bank resilience: Additional Tier 1 Capital in Australia’, September 2023.
[3] APRA Discussion paper ‘A more effective capital framework for a crisis’, September 2024.
[4] APRA letter ‘A more effective capital framework for a crisis: Update’, December 2024.
[5] APRA Consultation paper ‘Removing Additional Tier 1 capital from the prudential framework’, July 2025.
[6] APRA letter ‘Finalising the removal of Additional Tier 1 capital’, December 2025.