A type of debt instrument issued by banks to satisfy their Basel III capital requirements are AT1 bonds, also known as Additional Tier 1 bonds. These bonds are perpetual and have no expiration date. The issuer has the option of calling them or redeeming them at its discretion. They can, however, be written off or converted into equity if certain trigger events occur, making them high-risk instruments in the event of a bank’s financial distress. Because of this, they are more risky than senior bonds or deposits, which are typically secured by write-downs.
Investors who hold AT1 bonds could suffer significant losses if a bank writes off or “bails in” the securities. The bank’s other debt instruments, such as senior bonds or deposits, may see a selloff as a result of a loss of confidence in the bank’s ability to repay its debt.
The size and importance of the affected bank will determine how the elimination of AT1 bonds affects the global bond market. The impact can be significant and widespread if the bank is substantial and systemically significant, such as a global investment bank. As a result, investors may be more wary of AT1 bonds and banks may be forced to offer higher returns to offset the increased risk. Banks and other issuers could see their borrowing costs rise as a result of this, which could result in a risk reevaluation in the bond market.
The riskiest bonds issued by Credit Suisse, Additional Tier 1 (AT1), are subject to losses of up to $17 billion, which has the potential to destabilize Europe’s $275 billion bond market. Other regions may experience a cascading effect as a result of this. The Credit Suisse meltdown of AT1 bonds is not the first such crisis. Yes Bank in India failed to repay its AT1 bondholders in 2020, resulting in losses of approximately $1.3 billion, highlighting the risk that investors face when investing in such instruments.
Retail investors should be especially aware of the dangers of investing in AT1 bonds because they can lose a lot of money in the event of a bank financial crisis, as Credit Suisse and Yes Bank have shown, and they aren’t as safe as they thought. Before investing in such instruments, investors ought to seek the advice of a professional or conduct adequate research.”
GoldenPee Technologies’ CEO and co-founder is Mr. Abhijit Roy.