Bank for International Settlements Financial Stability Institute brief outlines AT1 reforms to restore going concern loss absorption

In a technical brief reflecting the authors' views, the Bank for International Settlements Financial Stability Institute examines whether Additional Tier 1 instruments still function as going-concern capital and concludes that current designs generally do not. The brief says AT1 has in practice behaved more like gone-concern capital, with loss absorption occurring only at or near non-viability rather than early enough to support recovery while a bank remains viable. The authors identify three main weaknesses in current AT1 structures: trigger thresholds that are too low relative to banks' effective capital requirements, discretionary activation that is typically used too late to support recovery, and writedown or weakly dilutive conversion terms that do not give shareholders enough incentive to recapitalise early. To restore the going-concern role, the brief sets out three core design changes: make sufficiently dilutive, variable and market-linked conversion the main loss-absorption mechanism, eliminate writedown and discretionary going-concern triggers, and set Common Equity Tier 1 triggers high enough to support recovery. It also says policymakers would need to weigh those reforms against trade-offs including potentially higher bank funding costs, effects on capital buffer usability and deleveraging incentives, and a smaller residual role for AT1 in resolution funding once non-viability is reached.