The largest Indian Bank, State Bank of India, has proposed to raise Rs. 8000 crore through additional Tier 1 bonds (called AT1 bonds) by March 2018.  The necessary board approval has since been received through BASEL III Compliant debt instruments, the report adds.

What are TIER 1 CAPITAL (AT 1)

Tier 1 capital or AT1 is the core measure of a bank’s financial strength from a regulator’s point of view. I t is composed of core capital, which consists primarily of common stock and disclosed reserves (or retained earnings), but may also include non-redeemable non-cumulative preferred stock.  These are the capital instruments, which are continuous in nature, meaning there is no fixed maturity which normally include:

  • Preferred Shares
  • High contingent convertible securities

There is no incentive for redeeming these instruments.  Here the Contingent Convertible securities form a major portion of the Tier1 capital which is readily available to the company during exigencies.  These convertible securities are also referred to as as CoCos which absorb a company’s loss through converting into company’s equity or through the process of writing off down.

Also AT1 instruments must either be converted in to ordinary shares or have their principle amount written down (either on a permanent or temporary basis) if the ratio of the firm’s Common Equity Tier 1 (CET1) to its total risk weighted assets falls below 5.125%.  It may also be noted that the AT1 instruments will rank above ordinary shareholders but will be sub ordinated to the claims of holders of Tier2 instrument holders, Senior Creditors and Depositors.

Author: Admin Bankedge

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