AT1 Bonds – UPSC Prelims

AT1 Bonds:
  • AT1 Bonds stand for additional tier-1 bonds. These are unsecured bonds that have perpetual tenure. In other words, the bonds have no maturity date.
  • Purpose: These bonds are typically used by banks to bolster their core or tier-1 capital. These bonds were introduced by the Basel accord after the global financial crisis.
  • Returns and Risk: These bonds offer higher returns to investors but compared with other debt products, these instruments carry a higher risk as well.
  • AT1 bonds are subordinate to all other debt and only senior to common equity. Mutual funds (MFs) are among the largest investors in AT1 Bonds. These bonds have a call option, which can be used by the banks to buy these bonds back from investors.
  • Investors cannot return these bonds to the issuing bank and get the money. This means there is no put option available to its holders.
  • Banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bond’s face value, provided their capital ratios fall below certain threshold levels.
  • If the RBI feels that a bank is on the brink of collapse and needs a rescue, it can simply ask the bank to cancel its outstanding AT-1 bonds without consulting its investors.

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