Additional Tier 1 or AT1
In addition to a bank’s core capital or Tier 1 capital, it may also use other additional forms of capital to ensure its capital adequacy.
Tier 1 capital is used to describe the capital adequacy of a bank and is the core capital that includes equity capital and disclosed reserves. Equity capital is inclusive of instruments that cannot be redeemed at the option of the holder (AT1s). Tier 1 capital is the money a bank has to keep it functioning through all the risky transactions it performs, such as trading/investing and lending.
Tier 2 capital is the secondary component of bank capital, in addition to Tier 1 capital, that makes up a bank’s required reserves. Tier 2 capital is designated as supplementary capital, and is composed of items such as revaluation reserves, undisclosed reserves, hybrid instruments and subordinated term debt. Tier 2 capital includes hybrid capital instruments, loan-loss and revaluation reserves as well undisclosed reserves.
In the event of a firm winding-up, the claims of AT1 instruments rank above ordinary shareholders but are subordinated to holders of Tier 2 instruments, senior creditors and depositors.
Additional Tier 1 or AT1 capital consists of capital instruments that are evergreen, in that there is no fixed maturity including:
These perpetual instruments must contain no incentive for the issuer to redeem them. CoCos are a major component of AT1 and their structure is shaped by their primary purpose as a readily available source of capital for a firm in times of crisis.
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