Economics • Banking & FinanceHard
Examine the capital adequacy guidelines under the Basel III framework. What specific category of capital instrument is included under 'Additional Tier 1 (AT1) Capital' for Indian banks?
A. Perpetual bonds carrying loss-absorption features such as write-down or conversion to equity upon breaching a trigger event✓ Correct Answer
B. General provisions and standard asset loan loss reserves maintained against unexpected credit defaults
C. Equity shares and disclosed statutory reserves representing the highest quality core capital
D. Subordinated debt instruments with fixed maturity periods and mandatory redemption schedules
💡 Solution & Explanation
Additional Tier 1 capital instruments consist of perpetual bonds that do not have a maturity date and include loss absorption mechanisms like principal write-downs if a bank's Common Equity Tier 1 ratio falls below a specified threshold. Common Equity Tier 1 represents the highest quality loss-absorbing capital, while Tier 2 includes subordinated debt and general provisions. AT1 bonds help banks meet regulatory capital buffers without diluting existing voting equity shares immediately.
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