“There are some institutions relying on AT1 capital in ‘going-concern’ concepts. They would have to adapt,” Michael Theurer, the Bundesbank’s head of banking supervision, told POLITICO in an interview. “But … we believe that it is possible to implement it for the whole industry with a prudent calibration without any turbulence.”
CoCo bonds, also known as Additional Tier 1 capital, have been popular with European banks for the last 15 years. Debt is less expensive to issue than equity, and so AT1s have represented for many a more efficient way to meet capital requirements that were radically tightened by the 2010 Basel III accords.
AT1 bonds are also popular with investors: during the period of low interest rates after the financial crisis, they were a rare way for bond investors to earn a decent return without taking on too much risk. Industry estimates put the total amount of AT1 debt outstanding at over €200 billion, with over €14 billion of such bonds sold in the first half of this year alone.
But European regulators have been uneasy about them since 2023, when a quirk of Swiss regulation led to AT1 holders being wiped out before shareholders in the collapse of Credit Suisse. That violated the generally accepted rule that bondholders be paid before shareholders in the event of a failure. Even though the EU’s existing regulation explicitly forbids a scenario like Credit Suisse’s, the desire to avoid a repeat has cast a shadow over AT1s as an asset class. The Netherlands already proposed scrapping them last year.
That proposal was received with some puzzled looks in banking circles. Two bankers granted anonymity to speak freely about the issue said the German authorities didn’t formally contact lenders before making the proposals, leading to some initial confusion over their implications and to the fear that capital requirements would be raised.
This is true of a parallel, but separate, proposal by the Bundesbank to simplify the rulebook for small banks. While he declined to say by how much, Theurer noted that under a comparable new regime in Switzerland, small banks have to hold capital worth 8 percent of their total assets, rather than the 3 percent dictated by Basel III.