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AT1s: still going through changes

By Tyler Davies
27 Jun 2019

Can a bank ever really be certain about its interpretation of the perfect capital structure?

Commerzbank broke a long-observed silence this week, when it said it would be issuing its first ever additional tier one (AT1) bond.

The German lender is one of the main missing pieces from a market that has grown to a size of nearly €180bn over the past five years or so.

Explaining its decision to join its peers, Commerzbank said a new issuance in the format would help it to “optimise its capital structure”, particularly in light of “changes in regulatory requirements”.

There was no use in the bank waiting for further clarity on the regulatory status of AT1 debt.

It is true that the case for issuing in the asset class was made clearer in 2018, after the European Central Bank said it would stop firms from taking the common equity tier one (CET1) resources they use for Pillar 2 capital demands and “double counting" them to plug shortfalls in AT1 capital.

But market participants have long known that the product is useful in minimising the need to have large stocks of expensive CET1 funds on the balance sheet.

Besides, there is little reason to think that the rules about AT1 are going to remain exactly the same for a significant time.

Ironically, Commerzbank even managed to stumble on the big lingering regulatory uncertainty in the market with its long-delayed mandate this week.

It has chosen to issue an AT1 with a low CET1 trigger of 5.125% — something that many bank capital experts, including Germany’s Bundesbank, think is no longer fit for purpose.

Indeed, the regulatory value of different AT1s could well end up being as up and down as their market values.

By Tyler Davies
27 Jun 2019