Tier 1 capital
is an instrument that refers to the financial status of a bank. It is a key measure of a bank’s financial strength and solvency and is comprised of common stock, declared reserves and preferred stock.
It is often used by regulatory agencies in developed economies and is considered indispensable for determining the creditworthiness of a financial institution. Its use allows an accurate assessment of the financial health of a company because it is a clear and reliable measure of the liquid assets held by the financial institution.
By law, banks are required to hold a certain amount of Tier 1 capital. According to the Basel agreements, the capital of banks can be divided into two classes (tiers): a "main class (Tier 1) consisting of equity capital and balance sheet reserves from retained earnings after tax, and an "additional class" made up of additional items.
Banks issue the so-called Additional Tier 1 (AT1) in order to collect additional liquidity and reach the minimum necessary Tier 1 capital threshold or to cope with financial uncertainty scenarios. AT1s are perpetual bonds in general, which provide for call options with which the Bank can repurchase them from investors. They are subordinated to all other debts and very often have clauses that do not provide for early repayment incentives. Therefore, these bonds have a lower credit rating than the more senior debt securities of the same issuing credit institution, offering higher yields to compensate for this risk.
Piraeus Financial, 8.75% perp., EUR
can serve as an example of Additional Tier 1.