Download the BYJU'S Exam Prep App for free IAS preparation videos & tests - Download the BYJU'S Exam Prep App for free IAS preparation videos & tests -

AT-1 Bonds Latest News

Additional Tier-1 (AT-1 Bonds) Bonds are a type of perpetual bond that doesn’t have any expiry date and is issued to raise long-term capital. In this article, we shall discuss at length the AT-1 bonds, important from the perspective of the government and the IAS Exam.

In March 2020, the Reserve Bank of India came up with a proposal to write down AT-1 bonds. This write-down was – part of a restructuring package for Yes Bank – led by the State Bank of India.

This article will further elaborate on AT-1 bonds within the context of the Civil Services Examination.

Refer to the links below for exam preparation, in line with the UPSC Syllabus:

Electoral Bonds Municipal Bonds
Negative Yield Bonds Masala Bonds
Major Stock Exchanges of India Sovereign Gold Bond Scheme 

Additional Tier-1 Bonds Latest Updates

Recently, the Bombay High Court’s decision to write down AT1 bonds was appealed by YES Bank and Reserve Bank of India (RBI) before the Supreme Court (SC).

News in detail:

  • At the Bombay High Court, the judgment to write down AT1 bonds from Yes Bank’s books was contested by four institutional investors and three private investors. It was decided against writing off the debt.
  • The following terms and conditions are contained in the information memorandum that was provided to the Securities and Exchange Board of India (SEBI) at the time of the AT1 bond issue:
    • Non-Payment due to Bank’s Weak Capital Position: Potential investors should be aware that the bank may not make the payment of the coupon due on the Debentures if the Bank’s capital falls below the statutory standards. At an early stage of risk detection, the bank may exercise the above right.

What are AT-1 Bonds?

AT-1 bonds were first conceptualized following the disastrous global financial crisis of 2008 when a lot of banks were closed down.

AT-1 bonds are like standard bonds but have a comparatively higher rate of interests. They are also listed and traded on stock exchanges. This means that the person holding the bond can sell it in the secondary marketing in case funds are required.

  • Banks issuing AT-11 bonds can even reduce the bonds’ face value.
  • AT-1 bonds are regulated by the Reserve Bank of India (RBI). If there is a need for RBI to bail out a bank it can tell the bank to write-off its outstanding AT-1 bonds without necessarily consulting its investors.

To know more about other types of bonds, visit the liked article.

UPSC 2022

What Norms regulate AT-1 Bonds?

In India, Basel III regulates AT-1 Bonds. Basel III norms require Indian banks to maintain a capital ratio of 11.5% divided into 8% in tier 1 capital and tier 2 capital.

It should be noted that AT-1 bonds are known “unsecured subordinated perpetual non-convertible bonds” that constitute a component of a bank’s permanent capital. Banks issue AT-1 bonds so that Basel III norms regarding equity capital are met.

What are Basel-III Norms?

Basel III Norms are an international regulatory accord that had introduced a set of reforms, ensuring the improvement in regulation and supervision in the banking sector.

According to Basel-III norms banks’ regulatory capital is divided into Tier 1 and Tier 2, while Tier 1 is subdivided into Common Equity Tier-1 (CET-1) and Additional Tier-1 (AT-1) capital.

Find more NCERT notes for UPSC Exam through the linked article.

AT-1 Bonds- Download PDF Here

Kickstart your IAS exam preparation and refer to the following links for assistance:

What are the features of AT-1 Bonds?

The following are features of AT-1 bonds:

No fixed maturity date: AT-1 bonds have no maturity dates as they are perpetual bonds that remain with the bank. Sometimes AT-1 bonds are sold as limited-period bonds because they come with a feature of a call option by the one issuing the bond.

Premature recall: AT-1 bonds come with a clause that allows a bank to repay it prematurely, if an unexpected event, such as new taxes or new regulatory laws, occur during the time of issuing the bonds

Interest Payouts can be skipped: One of the crucial features of an AT-1 bond is that there is an option to skip on interest payouts without creditors coming after the issuer for defaulting on interest payments. SInce AT-1 bonds are intended to increase capital of banks they can legally incorporate clauses that allow banks to default on interest payouts provided that their capital falls below the regulatory requirement.

For more UPSC notes about the Indian Economy, visit the linked article.

AT1 Bonds and Credit Suisse Crisis

The Credit Suisse-UBS deal, wherein Credit Suisse was taken over by its arch-rival UBS, has resulted in a $17 billion wipeout for investors in Credit Suisse’s riskiest bonds – additional tier 1 or AT1. 

  • The possible consequence of this is that Europe’s market for these bonds, which is worth $275 billion, could be thrown into disarray, causing a probable ripple effect in other regions. 

Read more about the Credit Suisse crisis in the linked article.

The Biggest Losers: AT1 Bondholders

  • The AT1 bondholders of Credit Suisse are the biggest losers in the deal. 
  • The complete write-down of the bank’s AT1 bonds, without any equity being written off, reverses the settled principle of write-downs wherein shareholders take the hit ahead of bondholders. 
  • The action threatens to plunge European bond markets into turmoil as AT1 securities are considered the riskiest among bonds. 
  • AT1 bondholders come after senior bondholders but are ahead of equity shareholders.

European vs US Crisis

  • The banking sector crises on either side of the Atlantic have specific and somewhat distinct triggers. 
  • Credit Suisse was partly a victim of bond market losses, but multiple other factors were at play in its downfall. 
  • In the United States, more than 90% of deposits at Silicon Valley Bank (SVB) and Signature Bank were not insured, making them susceptible to bank runs.
  • Additionally, these banks had significant investments in long-term government bonds, which decreased in value when interest rates increased.
  • To raise funds, they sold some of their bonds, and when this information became known, anxious depositors hurried to withdraw their money.

Impact on Indian Banks

  • According to S&P Global Ratings, the decision to write down Credit Suisse’s AT1 bonds to zero after the lender’s takeover by UBS may contribute to a higher cost of capital for banks, including Indian lenders. 
  • The depreciation of these notes will have a negative impact on their pricing and may cause concern among investors. Nevertheless, some bankers believe that Indian banks’ ability to raise funds through AT1 bonds will not be significantly affected.
  • Experts suggest that Indian banks have a “restricted reliance” on these securities.
  • S&P has acknowledged that Indian banks can “withstand any potential contagion effects” arising from the banking crisis in the US and the Credit Suisse incident “because of their manageable connections” with global counterparts.

Conclusion

  • The Credit Suisse-UBS deal has resulted in the biggest wipeout yet for Europe’s AT1 market, potentially pushing Europe’s $275 billion market for these bonds into turmoil, with likely cascading impact across other geographies. 
  • The consequences of this agreement on the worldwide bond market may create obstacles for other lenders attempting to obtain new AT1 debt, particularly during a challenging period for the financial sector.
  • While Indian banks may face some impact, their manageable exposures and strong funding profiles are expected to help them endure any potential contagion effects.

Daily News

For more information about upcoming Government Exams, visit the linked article. More exam-related preparation materials will be found through the links given below

Related Links

Indian Financial System Forex Reserves Economic Mains Questions for UPSC
Treasury Bills Economy Questions in UPSC Prelims [2013-2020] UPSC MCQ On Economy – IAS Prelims
History of Banking in India UPSC Mains General Studies Paper 3 Strategy, Syllabus & Structure Topic-wise GS 3 Questions for UPSC Mains

Comments

Leave a Comment

Your Mobile number and Email id will not be published.

*

*