AT1 bond (Additional Tier 1)

AT1 bonds exist for one reason: after 2008, regulators wanted bank losses to land on investors who were paid to take them, not on taxpayers. The instrument that came out of Basel III is deliberately strange. It has no maturity date. It ranks one step above equity. And it contains a clause — the viability event trigger — that allows it to be written down or converted while the bank is still open for business.

That clause fires in one of two ways. The mechanical trigger is automatic: if the bank’s CET1 ratio falls below a threshold set in the prospectus, the write-down happens with no judgement involved. The regulatory trigger is discretionary: the supervisor declares the bank non-viable, and that declaration alone is enough.

The high yield is not generosity. It is the price of standing near the front of the loss queue — and an AT1 going to zero is the product working as designed, not a scandal in itself. What made the Credit Suisse case exceptional was the order of losses, not the loss itself; the full story, with the numbers and the court ruling, is in the article below.

Practical relevance: AT1 exposure does not only live in specialist products. It appears inside broad subordinated-financials funds, European financials credit funds and some high-yield strategies. The factsheet search terms are “AT1”, “CoCo” and “contingent convertible”.