Prudential Regulation Authority Rulebook

3.1

CRR requires AT1 instruments to contain a trigger of at least 5.125% CET1, but allows firms to select a higher trigger. It also recognises that the terms of an AT1 instrument may provide for a write-down that is either temporary or permanent, and that the amount converted or written down may be limited to that necessary to restore the firm’s CET1 ratio to 5.125% or may be greater.

3.2

Depending on the circumstances, an instrument with a trigger of 5.125% CET1 may not convert in time to prevent the failure of a firm. A temporary write-down may make it more difficult for the firm to re-establish its capital position following a stress. Also, conversion or write-down that only restores the firm’s CET1 ratio to 5.125% may leave the firm close to a second trigger event.

3.2A

CRR is indifferent to the equity or liability accounting classification of an AT1 instrument. Most of the AT1 instruments issued by UK firms are accounted for as equity, but in some cases, firms may prefer to issue liability-accounted AT1 instruments with certain features or other arrangements to manage certain market risks, such as currency risk, when issuing in currencies other than in the reporting currency. Some of these features or arrangements could undermine the subordination of payments or give rise to other prudential concerns.

3.3

Firms will wish to consider these factors when deciding how to exercise the choices available to them under CRR. The PRA expects to discuss with firms their analysis on features of draft capital instruments that they submit for our review under the PRA pre-issuance notification rules (Rule 7B, Definition of Capital Part, PRA Rulebook). As noted in paragraph 2.4, the PRA expects firms to refrain from including features in capital instruments that may affect their ability to absorb losses.