BOE Capital Adviser Says AT1s Should Be Ditched If Rules Change

(Bloomberg) — Additional Tier 1 bonds should not be part of banks’ capital stack if and when the Bank of England decides to overhaul its rules, an adviser at the central bank specializing in regulatory capital said at an industry event.

Thomas Jones said in a panel discussion that it was his personal opinion that AT1s shouldn’t be part of any revised structure, which ought to be simpler and only include common equity tier 1 capital and bail-in debt, according to people who watched the panel and asked not to be named as the event was private. Jones, who is a full-time policy adviser at the Bank of England, was speaking at an event organized by French lender BNP Paribas SA in London on Tuesday.

Jones’ comments didn’t refer to any current plans by the central bank, the people said. A representative for the Bank of England said that the bank has no plans to remove AT1 bonds from the capital stack. Jones didn’t immediately respond when Bloomberg reached out to him on LinkedIn.

Jones is a policy adviser and manager at the central bank, focusing on the definition of capital and securitization, according to his LinkedIn profile. He also represents the UK at a capital expert group of the Basel Committee on Banking Supervision, the international rule-setter.

His comments come after a period of scrutiny of the role of AT1 bonds in banks’ capital stacks. The securities were introduced after the financial crisis to ensure bondholders take losses first when a bank is in trouble and, along with common equity tier 1 capital, make up a lender’s going-concern capital layer. Issuing the debt is a way banks can bolster financial resources that’s usually cheaper than shares, and lenders could face a drag of profitability if they need to find an alternative way to comply with capital requirements.

The AT1 market was dramatically jolted about two years ago, when about $17 billion of Credit Suisse notes were rendered worthless as part of the lender’s government-brokered takeover by UBS Group AG.

The incident caused anger among AT1 holders and led central banks and regulators to reassess whether the risky securities were fit for purpose. Australia’s regulator subsequently decided to phase out AT1s, citing their ineffectiveness in preventing bank failures and saying that eliminating them will help simplify the capital framework of Australian banks.

Overall, the market has largely bounced back from the Credit Suisse writedown, and European banks issued the securities at a rapid pace last year, with investors snapping them up because of their high yields.

The BOE, through the Prudential Regulation Authority, is responsible for the supervision of British banks. It issued a statement on creditor hierarchy the day after the Credit Suisse wipeout in an attempt to reassure AT1 investors.

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