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CS Professional · Banking and Insurance - Laws and Practice · Risk Management in Banks and Basel Accords

Godavari Bank issued perpetual non-cumulative preference shares that qualify as Additional Tier 1 capital. Which feature is essential for such an instrument to count as AT1 under Basel III norms?

An Additional Tier 1 instrument must absorb losses, through write-off or conversion to equity when a pre-specified trigger is hit. It must also be perpetual, unsecured and subordinated. Fixed maturity, holder redemption or security over assets would disqualify it.

  1. AIt carries a fixed maturity of five years
  2. BIt gives the holder a right to redeem at any time
  3. CIt has loss absorbency, being written off or converted to equity on a pre-specified triggerCorrect
  4. DIt is secured by a charge on the bank's assets

Explanation

AT1 instruments must be perpetual, unsecured and subordinated, with discretionary non-cumulative coupons and loss absorption through write-down or conversion at a pre-specified trigger. Fixed maturity, holder redemption rights and security all conflict with the perpetual, loss-absorbing nature.

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