Additional Tier 1 and Tier 2 · RiskAtoms Academy

By the end you will be able to

1Check an instrument against the Basel criteria for AT1 and Tier 2: perpetual or dated, discretionary coupons, calls, subordination and the point of non-viability.
2Calculate the loss that sets off an AT1 trigger, and compare Basel's 5.125% minimum with RiskAtoms Bank plc's 7%.
3Calculate recognised Tier 2: straight-line amortisation in the last five years, and excess provisions up to 0.6% of IRB credit RWA.
4Explain why AT1 is equity in the accounts but not CET1, and what the 2023 Credit Suisse write-down showed.

Why it matters

L1.4.02: Types of bonds said that AT1 and Tier 2 bonds are written to meet the Basel rules. This lesson opens the terms. RiskAtoms Bank plc's £400m AT1 pays 7.5%, £30m a year, which the bank can cancel whenever it likes, and is wiped out if CET1 falls below 7% of RWA. In March 2023 holders of about CHF 16 billion of Credit Suisse AT1 found out what such terms mean.

Core explanation

Capital that is not equity, and how it absorbs losses

Going concern and gone concern

CET1 absorbs every loss first. The other two tiers are bonds or bond-like instruments that absorb losses at a defined point. AT1 is going-concern capital: it takes losses while the bank still trades, through a trigger or the cancellation of coupons. Tier 2 is gone-concern capital: CAP10.16 says its objective is “to provide loss absorption on a gone-concern basis”. The bank's instruments:

Illustrative dataRiskAtoms Bank plc's capital book

The same made-up UK bank as Level 3: £67bn of assets and £4bn of equity at 31 December 2025, in £ millions. Module 4.1 adds its regulatory layer: own funds, deductions, risk-weighted assets by risk type, buffers, the leverage exposure and MREL, computed from the Level 3 credit, trading, derivatives and operational risk books. Every figure is illustrative, not any bank's data.

Pro forma. The book applies Basel 3.1, the 2017 finalisation of Basel III, to the 31 December 2025 balance sheet. On that date the bank still reported under the old UK CRR. The UK applies Basel 3.1 from 1 January 2027, and the internal model approach for market risk from 1 January 2028 (PRA PS1/26, paras 1.23 and 1.24). So the book shows the bank as it would look under the new rules.

Term	AT1	Tier 2 notes
Amount	£400m	£500m
Coupon	7.5%, fully discretionary, non-cumulative	6.5%, contractual
Maturity	None (perpetual)	2032/12
First call	2030/06	2027/12
Loss absorption	permanent write-down at 7% CET1	At the point of non-viability
In the IFRS accounts	Equity	Liability (subordinated debt)
Counts now	£400m	£500m (+ £74.8m provisions)

The AT1 criteria

CAP10.11 lists them. The ones that shape an AT1 bond:

Criterion (CAP10.11)	What it means	RiskAtoms Bank plc's AT1
Perpetual (4)	No maturity, no step-ups or other incentives to redeem	Perpetual, fixed coupon
Calls (5)	Callable only after five years, with the supervisor's approval, and not if it creates an expectation of a call	First call 2030/06: allowed if issued no later than five years before
Coupons (7)	Full discretion to cancel at any time; cancelling is not a default	Discretionary and non-cumulative
Principal loss absorption (11)	If classified as a liability: write-down or conversion at a CET1 ratio of at least 5.125%	Equity-classified, with a 7% trigger all the same
Non-viability (16)	Written off or converted at the authority's option, at the point of non-viability	Required of every AT1 (or by law, CAP10.12)

The rest of the list makes AT1 junior and unsecured: subordinated to depositors, general creditors and the bank's subordinated debt; no security or guarantee; coupons paid only out of distributable items, and not linked to the bank's credit standing. A dividend stopper is allowed: cancelling a coupon may restrict distributions to ordinary shareholders, but nothing else.

Sort itAT1 or not?

Would each feature be allowed in an AT1 instrument under CAP10.11?

A call option after five years, needing the supervisor's approval
Missed coupons accumulate and must be paid later
A coupon that rises if the bank's rating falls
A holder's right to sell the bond back to the bank
No ordinary dividend while AT1 coupons are cancelled
A call in year 2 if a change in tax law hits the bond
Secured on a pool of the bank's mortgages

The trigger: 5.125% or 7%?

A going-concern AT1 needs a trigger. Basel requires one, at a CET1 ratio of at least 5.125%, only for AT1 that the accounts classify as a liability (CAP10.11(11)). The UK and EU CRR asks it of every AT1, whatever its accounting (PRA SS7/13, 3.1 and 3.2A). UK banks have a further reason to go higher: to count towards the UK leverage requirement, AT1 must have a trigger of at least 7% CET1 (SS45/15, 1.A.2). The book's AT1 uses 7%.

The level matters. On the book, a loss of £1,423.4m takes CET1 to 7%. Basel's 5.125% would need £1,851.0m, more than the £1,672.9m that takes CET1 below its 5.91% minimum with Pillar 2A. A trigger that only fires after the minimum is breached rescues no one.

Write-down or conversion

Either way, the AT1 principal stops being a claim and becomes CET1, so the CET1 ratio jumps and Tier 1 stays where it was. The difference is who ends up owning that CET1.

	Permanent write-down	Conversion to shares
What happens	Principal cut to zero; the gain goes to retained earnings	Principal exchanged for new ordinary shares
AT1 investors	Lose everything	Become shareholders
Old shareholders	Keep the company, and gain	Are diluted
CET1 after	Up by the principal	Up by the principal

A write-down can leave AT1 investors worse off than the shareholders below them. That was the heart of the Credit Suisse case.

Equity in the accounts, but not CET1

Under IAS 32, an equity instrument is a residual interest after all liabilities (para 11), and an instrument is equity only if it carries no contractual obligation to deliver cash (para 16(a)). Non-redeemable shares whose distributions are at the issuer's discretion are equity (AG26), and an issuer's option to redeem does not create a liability (AG25). RiskAtoms Bank plc's AT1 has no maturity, cancellable coupons and only an issuer call: it is equity, and sits in shareholders' equity on the balance sheet. But CAP10.8's first criterion for CET1 is to be the most subordinated claim in liquidation. AT1 ranks ahead of the ordinary shares, so it is Tier 1 capital, not CET1. The PRA notes that the CRR is indifferent to the accounting class (SS7/13, 3.2A).

Tier 2: dated, and fading

CAP10.16 asks Tier 2 to have an original maturity of at least five years, to be callable only after five years, and to be written off or converted at the point of non-viability. Like AT1, it ranks behind depositors and general creditors and is unsecured, but ahead of AT1. Then the rule that makes it fade: amortisation, “in the remaining five years before maturity … on a straight line basis” (CAP10.16(4)). The bank's notes run to 2032:

2025
5002026
5002027
5002028
4002029
3002030
2002031
1002032
0

Recognised Tier 2 from the £500m notes at each year end, £m. Callable from 2027, with the supervisor's approval.

Provisions can count too. Under the standardised approach, general provisions count up to 1.25% of SA credit RWA (CAP10.18); the book holds none. Under IRB, provisions above expected loss count up to 0.6% of IRB credit RWA (CAP10.19). The book's excess is £82.1m against a cap of 0.6% × £12,461.0m = £74.8m, so £74.8m counts: the cap binds.

The 2023 Credit Suisse write-down

TimelineCredit Suisse AT1, from rescue to court

1 / 5

19 Mar 2023

Merger and write-down

FINMA approved the takeover of Credit Suisse by UBS. The extraordinary government support would trigger a complete write-down of all Credit Suisse AT1, about CHF 16 billion, increasing its core capital (FINMA press release).

The formal version

The trigger. With CET1 $C_1$ , AT1 principal $A_1$ , trigger $\tau$ and RWA held fixed, a loss $L$ sets the trigger off when (CAP10.11(11) for Basel's minimum $\tau \ge 5.125\%$ ):

\begin{aligned} L^{*} &= C_1 - \tau\,\text{RWA} \\ &= 3{,}019.9 - 7\% \times 22{,}807.7 = 1{,}423.4 \quad (\tau = 7\%) \\ &= 3{,}019.9 - 5.125\% \times 22{,}807.7 = 1{,}851.0 \quad (\tau = 5.125\%) \end{aligned}

Tier 2 recognised from an instrument of amount $A$ with $n$ years to maturity (CAP10.16(4)):

\begin{aligned} T_2(n) &= A \times \min\!\Big(1,\ \frac{n}{5}\Big), \quad n \ge 0 \\ T_2(4) &= 500 \times \tfrac{4}{5} = 400 \quad \text{(end-2028)} \end{aligned}

Excess provisions (CAP10.19), with eligible provisions $P$ , expected loss $EL$ and IRB credit RWA $\text{RWA}_{\text{IRB}}$ :

\begin{aligned} T_2^{\text{prov}} &= \min\big(\max(0,\ P - \text{EL}),\ 0.6\%\ \text{RWA}_{\text{IRB}}\big) \\ &= \min\big(82.1,\ 74.8\big) = 74.8 \end{aligned}

Try it

Put a loss through the bank. At what loss does the AT1 trigger? Switch to Basel's 5.125%: how far below the CET1 minimum is the bank by the time it fires? Then compare who ends up with the CET1 under a write-down and under conversion.

Try itPull the AT1 trigger

Loss through CET1 (RWA unchanged)£0m

Trigger (CET1 ratio)

Mechanism

Before the trigger is tested: CET1 13.24%

After: CET1 13.24%, Tier 1 14.99%

Blue CET1, violet AT1. Dashed: the CET1 minimum with Pillar 2A (5.91%). Red: the trigger.

AT1 triggered?No

CET1 ratio after13.24%

Loss that sets off this trigger£1,423.4m

AT1 left£400m

Tier 1 ratio after14.99%

Total capital ratio after17.51%

The AT1 is untouched: losses so far fall on the ordinary shareholders alone.

The whole principal is converted or written down, as the book assumes. Under the CRR a bank may instead write down only enough to restore the CET1 ratio to 5.125% (SS7/13, 3.1). Illustrative data, £ millions.

Worked example

A bad year reaches the AT1

Suppose a run of losses takes £1,423.4m out of CET1 and RWA do not change. £ millions.

From the loss to the write-down

Step 1 of 5

1
The loss reaches the trigger
$\frac{3{,}019.9 - 1{,}423.4}{22{,}807.7} = \frac{1{,}596.5}{22{,}807.7} = 7.00\%$

Regulatory lens

The criteria are CAP10.11 and CAP10.16 of the Basel Framework. Resolution and bail-in, the other route by which AT1 and Tier 2 absorb losses, are in L4.1.07: TLAC and MREL and L4.9.09: Recovery and resolution.

In the UK

The CRR requires a trigger of at least 5.125% CET1 for every AT1 and lets the bank choose a permanent or temporary write-down, of the whole amount or only what restores the CET1 ratio to 5.125% (SS7/13, 3.1). The PRA warns that a 5.125% trigger may not fire in time to prevent failure and that a temporary write-down can make it harder to rebuild capital (3.2). AT1 counts towards the UK leverage requirement only with a trigger of at least 7% (SS45/15, 1.A.2).

In the book

The bank's £400m of AT1 is £49.0m short of the £449.0m AT1 slice of its requirement, and its Tier 2 is £23.9m short of its slice. CET1 fills both gaps. Issuing a little more AT1 would free CET1 for the buffers; L4.1.05: Capital buffers shows the effect.

Spark Atoms

Spark AtomA trigger that fires too late

Basel's 5.125% is the floor, not a target. On RiskAtoms Bank plc it would fire after a loss of £1,851m, by which point the bank would already be £178m below its CET1 minimum. At 7% it fires £249m before.

Spark AtomTier 2 that fades away

From the end of 2027, the notes lose a fifth of their capital value each year. By the end of 2028 the bank's total capital ratio would fall from 17.51% to 17.08% with nothing else changing. The notes' first call date, end-2027, falls just as amortisation begins.

Key takeaways

AT1 is going-concern capital: perpetual, no incentive to redeem, calls only after five years with approval, fully discretionary non-cumulative coupons, and a write-off or conversion at the point of non-viability (CAP10.11).
Basel requires a trigger of at least 5.125% CET1 only for liability-classified AT1; the CRR requires one for all AT1, and UK leverage rules ask for 7%. On the book a loss of £1,423.4m sets off the 7% trigger.
Write-down and conversion both turn AT1 into CET1; they differ in who owns it afterwards.
AT1 is equity under IAS 32 (no obligation to pay cash) but not CET1 (not the most subordinated claim).
Tier 2 is gone-concern capital with at least five years' maturity, amortised straight-line in its last five years: the book's £500m counts £400m at end-2028.
Excess IRB provisions count in Tier 2 up to 0.6% of IRB credit RWA: £74.8m of the book's £82.1m.

Reaction

Check what stuck

Question 1 · objective 3

A bank's £300m Tier 2 note matures in 3.5 years. How much counts as Tier 2 today, in £m?

£m

Question 2 · objective 2

A bank has CET1 of £2,000m and RWA of £25,000m. Its AT1 converts at a 7% CET1 ratio. With RWA unchanged, how large a loss sets off the trigger, in £m?

£m

Question 3 · objective 1

Which feature would stop a bond counting as AT1 under CAP10.11?

AA coupon that steps up by 1 percentage point if the bond is not called after ten yearsBA first call date five years after issue, needing the supervisor's approvalCA clause that stops ordinary dividends whenever a coupon is cancelledDCoupons that the bank may cancel at any time, with no catch-up

Question 4 · objective 4

RiskAtoms Bank plc's £400m AT1 sits in equity in its IFRS accounts. Why is it not CET1?

AIt is equity under IAS 32 because the bank never has to pay cash, but it ranks ahead of the ordinary shares, and CET1 must be the most subordinated claimBBecause its coupon is above 7%CBecause the PRA has not approved itDBecause it is held by institutional investors

Question 5 · objective 3

An IRB bank's eligible provisions exceed its expected loss by £150m. Its IRB credit RWA are £20,000m. How much of the excess counts in Tier 2, in £m?

£m

Glossary

Additional Tier 1: Additional Tier 1: perpetual, deeply subordinated instruments with fully discretionary coupons that absorb losses while the bank is still running (CAP10.11).
Tier 2: Tier 2: subordinated instruments with at least five years' original maturity that absorb losses when a bank fails (CAP10.16), plus some provisions.
Going concern: Going concern: the bank is still trading. Capital that absorbs losses here keeps it open.
Gone concern: Gone concern: the bank has failed or is being resolved. Capital that absorbs losses here protects depositors and senior creditors.
Trigger: The CET1 ratio at which an AT1 instrument is written down or converted into ordinary shares, set out in its terms.
Write-down: Reducing the instrument's principal, permanently or temporarily. The amount written off becomes CET1.
Conversion: Turning the instrument into ordinary shares at a set price. The holders become shareholders and the old owners are diluted.
Point of non-viability: Point of non-viability: the authority's decision that the bank would fail without a write-off or public support. AT1 and Tier 2 must absorb losses then (CAP10.11(16), CAP10.16(10)).
Dividend stopper: A clause that stops dividends on ordinary shares if an AT1 coupon is cancelled. Allowed: it restricts only distributions to common shareholders.
Amortisation of Tier 2: In its last five years, a Tier 2 instrument counts for a straight-line falling share of its amount: 4/5 with four years left, and so on (CAP10.16(4)).
Excess provisions: Under IRB, eligible provisions above expected loss. They may count in Tier 2 up to 0.6% of IRB credit RWA (CAP10.19).
IAS 32 equity test: IAS 32: an instrument is equity if it carries no contractual obligation to deliver cash or another financial asset (paras 11 and 16(a)).

Deep Dives & Origins

Deep Dives

FINMA, Lessons Learned from the CS Crisis, 19 December 2023: the supervisor's own account of the run-up and the rescue options. Intermediate.
Prudential Regulation Authority, SS7/13 Definition of capital, chapter 3: the PRA's expectations for AT1 terms. Intermediate.

Origins

Basel Committee on Banking Supervision, CAP10: Definition of eligible capital, paras 10.8, 10.11, 10.12, 10.16, 10.18 and 10.19 (version effective 15 December 2019), bis.org.
IFRS Foundation, IAS 32 Financial Instruments: Presentation, paras 11, 16, 17, AG25 and AG26, 2022 issued standards, ifrs.org.
Prudential Regulation Authority, SS7/13 Definition of capital (CRR firms), chapter 3, paras 3.1–3.3, PRA Rulebook (version of 1 January 2023).
Prudential Regulation Authority, SS45/15 The UK leverage ratio framework, November 2025 update, para 1.A.2.
FINMA, “FINMA approves merger of UBS and Credit Suisse”, press release, 19 March 2023.
FINMA, “FINMA provides information about the basis for writing down AT1 capital instruments”, 23 March 2023.
FINMA, Lessons Learned from the CS Crisis, 19 December 2023, pp. 7 and 19.
FINMA, “FINMA to appeal partial decision of the Federal Administrative Court concerning AT1”, 15 October 2025.
SRF News, “AT1-Anleihen der Credit Suisse: Bundesgericht gewährt UBS aufschiebende Wirkung”, 10 December 2025.

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