Tier 1 capital: Difference between revisions

{{aai|crr|{{image|CS tier 1 chart|png|[[Lucky]]’s CET1 and AT1 compared since issue, yesterday.}}}}{{dpn|/tɪə wʌn ˈkæpɪtl/|n|}}

Of a regulated financial institution, that part of the capital structure below everything else that gives the bank’s depositors and other senior creditors — and the wider financial community we like to call “[[Systemic Solvency Club]]” — comfort that their debts will be met and deposit withdrawals honoured.   

There is a certain type of financial analyst who get annoyed if you say banks “hold” capital, for the pedantic reason that capital is a really just what is left of your assets after you deduct your liabilities, and isn’t something you “hold”, as such. It is a difference between two other things, rather than a thing in itself.

But that pedantic distinction can be important, as we will see.

Now: what are “tier 1 capital securities,” then?

Then the [[global financial crisis]] happened, and the global community of bank regulators and their assorted committees, councils and forums — Systemic Solvency Club — got together, promulgated a largely coordinated set of bank resolution and recovery regimes, in the process savagely increasing tier one capital requirements for all banks. Especially big ones.

Even leaving titillating bank analyst punch-ups aside for a moment, the abstract conceptual question this throws out is a a belter: should creditors, however subordinated, ''ever'' rank ''behind'' shareholders?   

First, a little spoiler: ''effectively'' ranking behind shareholders and ''actually'' ranking behind shareholders may ''feel'' similar — especially if you have just been written down to zero while the shareholders live to see another day — but they are different. When an AT1 is written down, its creditors ''actually'' rank ''ahead'' of shareholders. It is just that they get zero.

Another spoiler: this should not have come as a surprise. Issuers ''must'' have contemplated writing AT1s down while shareholders survived: otherwise, why even ''have'' write-down Notes? A write-down contingent on total shareholder annihilation is no different from a normal conversion to equity: you get what the shareholders get: zero. If that is the plan, just issue normal contingent convertible bonds.  But these AT1s were ''not'' convertible. They were “Perpetual Tier-1 Contingent ''Write-Down'' Capital Notes”. Again, that name. Important.   

So, when resolving a company that has gone bust, you must deal with AT1 creditors ''before'' you finally settle up with shareholders. You can do this two ways: you can convert the AT1s into shares or, if its terms permit, you can just write them off altogether. Either way, by the time you deal with shareholders, no AT1s are left. A written down AT1 ''has'' been paid in full. The liability was just zero.  

But AT1 investors whose notes are written off still ''feel'' as if they are ''effectively'' ranking behind shareholders. This is their [[lived experience]]: they get nothing and shareholders get something.