AT1 Bonds

AT1 Bonds

AT1 Bonds

This article covers “Daily current events “and the topic is about ‘AT1 bonds which are in news, it covers the “Indian Economy” In GS-3 and the following content has relevance for UPSC. 

For Prelims: Facts about AT1 Bonds, Basel-3 norms

For Mains: GS-3, monetary policy

Why in news:

The write-off of Yes Bank Ltd.’s Additional Tier-1 (AT1) bonds was recently overturned by the Bombay High Court on Friday. The bank facilitated the sale of AT1 bonds from institutional investors to individual investors, according to a Sebi inquiry.

It was determined that individual investors were not made aware of all the risks associated with purchasing AT1 bonds during the sale process.

Super FD and “as safe as FD”: According to the Sebi inquiry, Yes Bank misrepresented these bonds to investors as being “Super FD” and “as safe as FD.”

Bonds were sold irresponsibly, according to SEBI, which also discovered that Yes Bank’s managing director had pushed the institution to lower the price at which it was selling the AT1 bonds.

About AT1 Bonds

Perpetual bonds, also known as AT1 bonds, have a call option but no set maturity date. If the bond’s issuer can obtain funds at a lower cost, particularly when interest rates are lowering, it may call or redeem the bond. They are identical to other bonds issued by banks and enterprises but have a little higher interest rates. In order to increase their core capital base and comply with Basel-III standards, banks issue these notes.

The exchanges also list and trade these bonds. Therefore, if a holder of an AT-1 bond needs cash, he can sell it on the secondary market. These bonds cannot be returned to the issuing bank and received in whole by the investor. Therefore, its holders do not have access to a put option. Banks that issue AT-1 bonds have the option to forego interest payments for a specific year or even lower the bonds’ face value.

The Reserve Bank of India is in charge of regulating AT-1 bonds (RBI). The RBI may simply request that a bank write off its existing AT-1 bonds without first seeking investor consent if it believes the bank needs to be saved.

Details on AT1 Bonds

A bond is just a company’s loan to itself. The company receives funding from investors who purchase its bonds rather than a bank.

Interest coupon

The interest coupon is the annual interest rate paid on a bond stated as a percentage of the face value that the company gives in exchange for capital.

Interest

The lender reimburses the principal on the loan’s maturity date and pays the interest at regular intervals (often annually or semiannually).

Significance

The bond market can assist investors in diversifying outside of stocks. Bonds can be identified by their maturity, coupon (interest) rate, tax status, and callability, among other attributes.

Various Bond Types

Central Government Bonds

Because the government issued these bonds, the government is guaranteeing them. They are among the safest bonds because of this. However, because of their prolonged age, these bonds are vulnerable to the danger of inflation.

State Government Bonds

State Development Loans are another name for state government bonds (SDLs). They are issued by state governments to pay for infrastructure improvements within the state or in times of financial stress, among other uses.

Public Sector Bonds

These bonds are typically issued by prestigious public sector businesses or organizations to finance their expansion and growth requirements. Compared to corporate bonds, they pose a smaller risk.

Corporate Bonds

Private businesses are the ones that issue corporate bonds. They account for a sizable percentage of the bond market.

Basel III Standards

  • It is an international regulatory agreement that implemented a number of reforms meant to enhance the supervision, regulation, and risk management of the banking industry following the 2008 financial crisis.
  • The Basel-III standards required banks to retain a minimum amount of capital and refrain from lending all of their deposit-derived income.
  • Regulation capital for banks is split into Tier 1 and Tier 2 in accordance with Basel-III standards, with Tier 1 capital further broken into Common Equity Tier-1 (CET-1) and Additional Tier-1 (AT-1) capital.
  • Equity instruments that have returns correlated with bank performance and, consequently, share price performance are included in common equity Tier 1 capital. They are immature.
  • CET and AT-1 are referred to as Common Equity. Minimum Common Equity Capital Requirements have been established under Basel III regulations.
  • Unsecured subordinated debt with an original maturity of at least five years makes up Tier 2 capital.
  • In accordance with the Basel standards, these bonds may be written off if the required minimum Tier-1 capital falls below 6%.

Source:

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