Strengthening the going-concern role of AT1: options and trade-offs

Highlights

• Additional Tier 1 (AT1) instruments are designed to operate as going-concern capital. In instances where the issuer reaches the point of non-viability, these instruments also support an orderly resolution of a gone concern.
• Nonetheless, in practice, the effectiveness of AT1 Instruments in fulfilling their primary role as going-concern capital is undermined by low trigger thresholds, the discretionary nature of activation and insufficient incentives for recapitalisation.
• Restoring this function rests on three elements: (i) sufficiently dilutive, variable and market-linked conversion as a principal loss-absorption mechanism; (ii) elimination of writedown and of discretionary going-concern triggers; and (iii) Common Equity Tier 1 (CET1)-linked triggers set high enough to support recovery.

• Such reforms have to be weighed against potential adverse implications for banks' funding costs, buffer usability and resolution funding.

The views expressed in this publication are those of the authors and do not necessarily reflect the views of the BIS, its member central banks or the Basel-based standard-setting bodies.