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Tier 1 capital: Difference between revisions
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When banks complained about this — equity capital is quite the drag on performance — regulators conceded there could be a layer of tier 1 capital which wasn’t ''actually'' common equity, but could be made to ''behave'' like it, should a bank’s chips ever got really down. | When banks complained about this — equity capital is quite the drag on performance — regulators conceded there could be a layer of tier 1 capital which wasn’t ''actually'' common equity, but could be made to ''behave'' like it, should a bank’s chips ever got really down. | ||
On the good days, this layer could behave a lot like debt: it could pay fixed [[Coupon|coupons]], and redeem — ''if'' it redeemed — at par. | On the good days, this layer could behave a lot like debt: it could pay fixed [[Coupon|coupons]], and redeem — ''if'' it redeemed — at par. If things got gnarly, it could convert into common equity, or just go away altogether. <Ref>There is also another level: [[alternative tier 2 capital]]. Let’s leave that be.<> | ||
Everyone concluded that since they were wise , had learned lessons and fixed the systemic problems, the prospect of lots of banks’ chips getting really down again, at once, was pretty low, so as long as banks created these new capital instruments, how they would work at the sharp end was mostly academic. So it sounds like no-one read the prospectuses. This must be galling for the poor [[legal eagles]] who ''wrote'' those monsters, but this is not their story. | |||
Well, that was 2008. Now it is March 2023 and here we all are. | |||
Anyway, this new layer of “quasi common equity” came to be known as [[alternative tier 1 capital|“alternative” tier 1 capital]], or “[[AT1]]” which, when said aloud, sounds like “[[eighty-one]]”. People got excite4d about it. Our favourite [[Credit Suisse|lucky pooch]] even asked, in a thought piece in 2021, “contingent convertible bonds — better than bank equity?”<ref>[https://www.credit-suisse.com/lu/en/articles/asset-management/contingent-convertible-bonds-lu-202101.html See here.] Joking aside, the answer remains, “other than for distressed speculators, ''yes''”. In any case, they are talking about contingent convertibles, not write-down notes.</ref> | Anyway, this new layer of “quasi common equity” came to be known as [[alternative tier 1 capital|“alternative” tier 1 capital]], or “[[AT1]]” which, when said aloud, sounds like “[[eighty-one]]”. People got excite4d about it. Our favourite [[Credit Suisse|lucky pooch]] even asked, in a thought piece in 2021, “contingent convertible bonds — better than bank equity?”<ref>[https://www.credit-suisse.com/lu/en/articles/asset-management/contingent-convertible-bonds-lu-202101.html See here.] Joking aside, the answer remains, “other than for distressed speculators, ''yes''”. In any case, they are talking about contingent convertibles, not write-down notes.</ref> | ||