AT1 Bonds

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Context

Indian banks’ dependence on AT1 bonds is limited: Citi Bank Report.

Read all about AT1 Bonds: https://www.iasgyan.in/daily-current-affairs/at1-bonds-decoded#:~:text=What%20are%20AT1%20bonds%3F,these%20bonds%20back%20from%20investors.

More about AT1 Bonds

Additional Tier 1 bonds, are a type of perpetual debt instrument.
These bonds are perpetual in nature — they do not carry any maturity date.
Banks use these Bonds to augment their core equity base and thus comply with Basel III norms.
Banks have a call option that permits them to redeem these bonds after a certain period, say, 5 or 10 years.
These bonds are subordinate to all other debt and senior only to equity.

The AT1 origin story

AT1 bonds date back to the aftermath of the 2008 financial crisis, when regulators tried to shift risk away from taxpayers and increase the capital financial institutions held to protect them against future crises.
These bonds were introduced by the Basel accord to protect depositors. They were a way for failing banks to absorb losses

High Return High-Risk Bonds

These Bonds offer higher returns to investors. But compared to other debt products, these instruments carry a higher risk as well.
These bonds can be written down by banks under the directions of the Reserve Bank of India (RBI) in the event of an institutional failure. Hence, they are seen as high-risk instruments. If the bank reaches the point of non-viability, AT1 bonds are the first part of the debt that will be written down.

Note: The market for AT1 bonds took a hit after the Yes Bank write-off. Investors have begun to look at these instruments with caution since then.

Read about, Tier 1 Capital, Yes Bank Episode, and its implications in the link mentioned above.

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PRELIMS PRACTICE QUESTION

Q. Choose the correct answer with reference to the following statements.

A. Additional Tier-1 Bonds offer higher returns to investors compared to other debt products.

B. Additional Tier-1 Bonds are subordinate to equity and senior to all other debt bonds.

1) A only

2) B only

3) Both A and B

4) Neither A nor B