The term Hybrid is generally used to describe securities that have features of both debt instruments (fixed income) and equity instruments (shares).
Bank Hybrids are not guaranteed by the issuing bank or the government whereas bank deposits may be protected by a government guarantee under the Australian Government's Financial Claims Scheme Financial Claims Scheme A government guarantee for deposits up to an amount per account holder per ADI of $250,000. . An investment in Bank Hybrids is generally considered to have less risk than an investment in a bank’s ordinary shares (although unlike ordinary shares, they can be written-off Write-off If Bank Hybrids are written-off, investors will lose all of the value of their investment and they will not receive any compensation or unpaid distributions or interest. ) but more risk than a bank deposit or other forms of senior unsecured bank lending (e.g., bank bonds).
Another feature that adds to the complexity of Bank Hybrids is that they may be converted into ordinary shares or written-off Write-off If Bank Hybrids are written-off, investors will lose all of the value of their investment and they will not receive any compensation or unpaid distributions or interest. in certain circumstances (see Conversion events). This can lead to a change in the ranking of a holder's investment:
Companies issue Hybrids to diversify their sources of funding and capital. In addition, banks need to ensure that they are well capitalised to support their lending activities and meet regulatory capital requirements set by APRA APRA The Australian Prudential Regulation Authority. , the prudential regulator of the Australian financial services industry.