(Reuters) - Australia's prudential regulator proposed to replace bank hybrid bonds with more reliable and less expensive forms of capital on Tuesday, as rising ownership of hybrid securities among retail investors poses a financial stability risk.

The Australian Prudential Regulation Authority (APRA) had been seeking feedback from the industry after issuing a discussion paper in September 2023, as it was worried over the high ownership of bank hybrids by local retail investors.

The regulator is intending to simplify the use of additional tier-1 (AT1) capital instruments, often called hybrid bonds to improve and simplify the effectiveness of bank capital in times of crisis, it said in a statement.

The APRA has been ramping up its efforts to solidify the Australian financial system, seeking to protect depositor funds, amid rising market worries that hybrids might not be able to protect the country's economic system as they are primarily owned by smaller investors.

Australia's "Big Four" banks - Commonwealth Bank of Australia ( CBAUF ), National Australia Bank ( NAUBF ), Westpac and ANZ Group ( ANZGF ) - did not immediately respond to Reuters' request for comments.