Explained:AT-1 bonds

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News:The Reserve Bank of India(RBI) reconstruction plan for Yes Bank has put at risk nearly Rs 9,000 crore worth of AT-1 bonds.

Facts:

About AT-1 Bonds:

  • Additional tier-1 bonds also called AT1 are a type of unsecured, perpetual bonds that banks issue to shore up their core capital base to meet the Basel-III norms.
  • The Reserve Bank of India(RBI) is the regulator of AT-1 bonds.

Key Features of AT-1 bonds:

  • Bonds are perpetual and carry no maturity date.Instead,they carry call options that allow banks to redeem them after five or 10 years.However, banks are not obliged to use this call option and can opt to pay only interest on these bonds for eternity.
  • Investors cannot return these bonds to the issuing bank and get the money.This means there is no put option available to its holders.
  • Banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bonds face value provided their capital ratios fall below certain threshold levels.
  • If the RBI feels that a bank is on the brink of collapse and needs a rescue, it can simply ask the bank to cancel its outstanding AT-1 bonds without consulting its investors. 

Additional information:

About Basel Norms:

  • Basel norms refer to broad supervisory standards formulated by a group of central banks- called the Basel Committee on Banking Supervision (BCBS).
  • The norms aim to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.
  • Basel-III norms were introduced in response to the financial crisis of 2007-09.The measures aim to strengthen the regulation, supervision and risk management of banks.