Additional Tier 1 capital (AT1) is a category of bank regulatory capital made up of perpetual instruments that can absorb losses while the bank is still operating. It ranks below all debt and above ordinary shares, and it counts, together with Common Equity Tier 1 (CET1), towards a bank's Tier 1 capital. Banks issue AT1 because it is usually cheaper than new equity and, in many countries, its coupons are tax-deductible.
The category was defined by the Basel Committee on Banking Supervision in Basel III, replacing the looser "hybrid" Tier 1 instruments that failed to absorb losses in the 2007 to 2009 financial crisis. AT1 securities are often called contingent convertibles or CoCos, although not every AT1 converts into shares; some are written down instead.
What qualifies as AT1
To count as AT1 an instrument has to behave like equity in the ways that matter to a supervisor. The Basel standard, and the laws that apply it such as the Capital Requirements Regulation in the European Union, set out conditions along these lines:
- Perpetual. The instrument has no maturity date, like a perpetual bond, and no step-up or other feature that creates an incentive for the bank to redeem it.
- Callable only by the issuer. A call is allowed after a minimum of five years, and only with the supervisor's prior approval.
- Fully discretionary coupons. The bank can cancel a coupon payment at any time, missed coupons do not accumulate, and cancellation is not an event of default.
- Deeply subordinated. Holders rank behind depositors, senior creditors and Tier 2 capital such as subordinated debt.
- Loss-absorbing. The principal is written down or converted into ordinary shares if a defined trigger is reached.
How the capital stack uses AT1
Basel III sets minimum ratios against risk-weighted assets (RWA): 4.5% for CET1, 6% for Tier 1 and 8% for total capital. The gap between the first two figures means that up to 1.5% of risk-weighted assets can be met with AT1 rather than common equity. Capital buffers, including the capital conservation buffer, must be met with CET1 alone, so AT1 does not help there. AT1 does count as Tier 1 for the leverage ratio and forms part of the total capital ratio.
AT1 also counts towards the wider loss-absorbing requirements placed on large banks, namely total loss-absorbing capacity (TLAC) and, in the European Union, the minimum requirement for own funds and eligible liabilities (MREL).
Triggers, write-down and conversion
AT1 instruments absorb losses in two ways. The first is a contractual trigger written into the terms: if the bank's CET1 ratio falls below a set level, the instrument is converted into shares or written down, either permanently or temporarily. Under Basel III, instruments that are accounted for as liabilities need a trigger of at least 5.125% of risk-weighted assets; many issuers choose a higher level, commonly 7%, to satisfy national supervisors or investors.
The second is the point of non-viability. The relevant authority can require the instrument to be written down or converted when it judges that the bank would otherwise fail, whether or not the numerical trigger has been reached. This links AT1 to the bail-in powers that resolution authorities hold over a failing bank's liabilities.
Before any trigger is reached, coupons are the first line of loss absorption. A bank that breaches its combined buffer requirement faces limits on distributions, which can force it to cancel AT1 coupons while it still looks solvent.
Risks for investors
AT1 securities pay higher coupons than senior or Tier 2 debt because holders carry risks that ordinary bondholders do not. Coupons can be switched off without default. The instrument may never be repaid, since the issuer decides whether to call it; markets nonetheless price most AT1 to the first call date, so a decision not to call can cause a sharp fall in price. And the principal can be lost before shareholders are wiped out, depending on the contract and local law.
That last point became widely known in March 2023, when the Swiss authorities wrote down about 16 billion Swiss francs of Credit Suisse AT1 instruments to zero as part of its takeover by UBS, while shareholders received some value. Supervisors in the European Union and the United Kingdom responded by stating that, under their frameworks, common equity absorbs losses first. The episode led to litigation and to a wider debate about whether AT1 is too complex to serve its purpose.
Criticism and reform debate
Critics argue that AT1 has rarely absorbed losses in a going concern as intended, because banks and supervisors are reluctant to cancel coupons or skip calls for fear of unsettling the market. Some authorities have questioned whether the instrument should remain part of the capital framework at all, while others would simplify it or raise trigger levels. Supporters point out that it gives banks a flexible source of Tier 1 capital and a class of investors with a strong interest in monitoring the issuer. Many jurisdictions restrict sales to retail investors because of the complexity of the terms.