The paper contributes to the ongoing debate, reignited by the 2023 banking crises, on the role of Additional Tier 1 (AT1) capital instruments in absorbing losses prior to potential insolvency situations. After retracing the Basel standards, their implementation across jurisdictions, established market practices, and the evidence from banking crises, the paper discusses potential areas for improvement to the regulatory framework.
Evidence from recent crises have highlighted the limited ability of AT1 capital instruments to absorb losses when they occur. Starting from such evidence, the paper explores potential changes to the current regulatory requirements – among which coupon cancellation and triggers for write-down/conversion of the instruments – that could enhance the loss absorption features of AT1s. Given the likely impact of those interventions in terms of regulatory complexity, the paper does not exclude a more radical rethinking of the AT1s' role in the capital stack.
