Economy Facts for Prelims 2020

WHAT ARE AT-1 BONDS
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• Additional Tier-1 (AT-1) bonds are unsecured perpetual bonds — with no maturity — issued by banks to  shore up  their capital base  to meet Basel  III  requirements.

• The RBI is the regulator for these bonds.

• TheAT-1Bonds was  introduced  by Basel  III  post  the  2008  financial  crisis,  to  protect  depositors  of  a  bank  on a going concern basis. These bonds are also commonly known as Contingent convertible capital instruments (CoCos).

• Under  the  Based  III  framework,  bank’s  regulatory capital is divided into Tier 1 and Tier 2 capital.
Tier 1  capital is subdivided into Common Equity (CET) and  Additional Capital (AT1).

In  simple  terms,  equity and preference capital is classified as CET and perpetual bonds are classified  as AT1.
Together, CET and AT1 are called Common  Equity.

Features of AT-1 Bonds
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• AT1 are a special category of debt designed to absorb  losses  in  case  the  bank’s  equity  capital  dips  below  a  certain threshold.

• These are quasi-equity  instruments. These are meant  to be like equity, but are structured as bonds.

• These  bonds  are  listed  and  traded  on  the  exchanges.  So, if an AT1 bondholder needs money, he can sell it  in the market.

• Banks cannot use conversion or write down of AT1 instruments to support expansion of balance sheet.

👉Prelims Facts

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Difference between Tier 1 and Tier 2 Capital

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* Tier 1 capital is a bank’s core capital and includes disclosed reserves—that appears on the bank’s financial statements—and equity capital. This money is the funds a bank uses to function on a regular basis and forms the basis of a financial institution’s  strength.
* Tier 2 capital is a bank’s supplementary capital. Undisclosed reserves, subordinated term debts, hybrid financial products, and other items make up  these funds.

* In India, banks are required to maintain capital at a minimum ratio of 11.5 per cent of their risk-weighted loans.
* Of this, 9.5 percent needs to be in Tier-1 capital and 2 percent in Tier-2.

Basel III
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*  It is an international regulatory accord that introduced a set of reforms designed to improve the regulation, supervision and risk management within the banking sector.

* It was published in 2009, largely in response to the credit crisis associated with the Great Recession.

* Its objectives are to:
1.  Improve the banking sector’s ability to absorb ups  and  downs  arising  from  financial  and  economic instability
2.  Improve risk management ability and governance of banking sector
3.  Strengthen bank’s transparency and disclosures.

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MERGER OF BANKS COMES INTO EFFECT
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The merger of 10 public sector undertaking banks into
four  came  into  effect  from  1st April,  2020. The Cabinet  Committee  on  Economic  Affairs  (CCEA)  had  approved  consolidation of 10 state-run banks into four on 4th March, 2020.

•In  2019,  Dena  Bank  and  Vijaya  Bank  were  merged  with Bank of Baroda.

• Prior to this, the government had merged five associate banks of SBI and Bharatiya Mahila Bank with the  State Bank of India.

Key Points
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• Oriental Bank of Commerce (OBC) and United Bank  of  India  will  be  merged  into  Punjab  National  Bank  (PNB). After the merger, these together will form the  second-largest public sector bank in the country, after  State Bank of India (SBI).

• Syndicate  Bank  will  be  merged  into  Canara  Bank,  which  will  make  it  the  fourth-largest  public  sector  lender.

• Indian Bank will be merged with Allahabad Bank.

• Union Bank of India will be merged with Andhra Bank  and Corporation Bank.

• Customers, including depositors of merging banks will  be  treated  as  customers  of  the  banks  in which  these  banks  have  been  merged with  effect  from  1st April,  2020.

• After the merger, there will be 12 PSUs - six merged  banks and six independent public sector banks.

• Six merged banks - SBI, Bank of Baroda, Punjab National Bank, Canara Bank, Union Bank of  India  and  Indian Bank.

• Six independent banks - Indian Overseas Bank, Uco  Bank, Bank  of Maharashtra,  Punjab  and  Sind Bank,  Bank of India and Central Bank of India.

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