The Australian Prudential Regulation Authority (APRA) said it expects all additional tier-1 capital instruments issued by banks as eligible regulatory capital to be phased out by 2032, to be replaced with cheaper and more reliable forms of capital that would absorb losses more effectively in times of stress, according to a Thursday statement.

The regulator finalized amendments to its bank prudential framework to phase out the existing capital instruments gradually to ensure an orderly transition and limit any immediate impacts on issuers or investors.

APRA will set the minimum leverage ratio requirement at 3.25% measured on a common equity tier-1 capital basis. The regulator lowered the leverage ratio from the originally proposed 3.5% after receiving feedback, saying that it 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 additional tier-1 bonds.

APRA is also proceeding with the proposal to retain the existing large exposure limits measured on a common equity tier-1 basis.

The new framework comes into effect on Jan. 1, 2027. The regulator consulted on the changes necessary to its prudential and reporting frameworks to implement the phase-out in July.

The shares of three of Australia's big four banks, Commonwealth Bank of Australia (ASX:CBA), National Bank of Australia (ASX:NAB), and Westpac Banking (ASX:WBC, NZE:WBC), all fell nearly 1% in recent trading on the Australian bourse on Thursday.