The prudential regulator is worried the high ownership of bank hybrids by Australian retail investors means faith in the financial system could be undermined, rather than protected, in the event the securities are written down.

The Australian Prudential Regulation Authority is seeking feedback from the industry after issuing a discussion paper on Thursday exploring “options to improve the effectiveness” of hybrids. APRA fears hybrids may not work as designed in a crisis, where their function is to spare depositors from losses at the expense of the hybrid investor.