AT1 Bonds Explained: Basel III Capital and the Yes Bank Write-Off Ruling

AT1 (Additional Tier 1) bonds are perpetual bank bonds that count as Tier 1 capital and can be written down or converted into equity when a bank is in trouble. The Supreme Court has now upheld the quashing of Yes Bank's ₹8,415-crore AT1 write-off, holding that a rescue scheme must itself authorise such a write-down.

Why in news: The Supreme Court dismissed the appeals against the Bombay High Court's 2023 judgment, which had quashed the 2020 write-off of Yes Bank's AT1 bonds.

Key facts at a glance

• Amount: ₹8,415 crore of AT1 bonds written to zero in March 2020.

• Ground: the final Reconstruction Scheme, 2020 (Section 45, Banking Regulation Act) had no write-down clause; the administrator could not add one.

• Courts: High Court quashed it in 2023; the Supreme Court stayed that order, and has now dismissed the appeals.

What are AT1 bonds and where do they sit in the Basel III capital stack?

To see what the Court protected, start with where AT1 sits in a bank's capital.

• Basel III: the Basel Committee's post-2008 standard; the RBI phased it in from April 2013.

• CET1: equity and reserves; minimum 5.5% of risk-weighted assets (RWAs); absorbs losses first.

• AT1: perpetual; up to 1.5% inside the 7% Tier 1 minimum; the bank may cancel the coupon, and a skipped coupon is never made up.

• Loss absorption: written down or converted into equity at a trigger (CET1 of at least 6.125%) or at the point of non-viability (PONV).

• Tier 2 and buffer: dated bonds, up to 2%; the 2.5% Capital Conservation Buffer (CCB), held in CET1, lifts the total to 11.5%.

AT1 bonds vs Tier 2 bonds: who loses first?

Capital that can be written down needs a queue, and seniority sets it. Think of a row of fuses: equity blows first, then AT1, then Tier 2; the depositors' circuit must never trip.

Why did the Supreme Court uphold the quashing of Yes Bank's AT1 write-off?

That design is what the Court measured the 2020 write-off against.

• Sequence: moratorium in March 2020; a Section 45 scheme days later; AT1 bonds written to zero the next day.

• Scheme text: the final scheme left out the write-down clause considered in drafting; the administrator could not add it himself.

• Tests applied: the scheme, the RBI Master Circular and the bonds' own terms.

• Equity vs bonds: bondholders lost everything; shareholders kept their shares, 75% locked in for three years.

What do SEBI's curbs and the Credit Suisse case add?

The episode changed who may hold AT1 bonds, and it was not unique.

• SEBI, 2020: only qualified institutional buyers (QIBs) may subscribe; minimum allotment and trading lot ₹1 crore.

• Credit Suisse, 2023: FINMA wrote down about CHF 16 bn of AT1 bonds while shareholders received UBS shares.

• Swiss court, 2025: found the write-down lacked a sufficient legal basis; FINMA's appeal is pending.

Prelims traps

1. AT1 is Tier 1, not Tier 2: perpetual, up to 1.5%. Tier 2 is dated, minimum five years, up to 2%.

2. 5.5%, 7% and 9% exclude the 2.5% buffer; with it, total capital is 11.5%. Basel III's own total minimum is 8%.

3. The Court did not ban AT1 write-downs; it quashed this one for want of authority in the scheme.

4. The RBI, not the bank, decides when PONV is reached.

Why it matters for UPSC

GS Paper III (banking, mobilisation of resources). Prelims: capital ratios, AT1 vs Tier 2, PONV. Mains: stability against creditor rights and the rule of law in resolution; cite the FRDI Bill, 2017, withdrawn in 2018 over its 'bail-in' clause. On RBI's ownership rules, see the IDBI Bank sale.

Mentor's note

• Don't write that AT1 write-downs are now illegal. The Court demanded authority in the scheme; PONV loss absorption stays.

• Know 5.5/7/9 and 2.5. UPSC asked about the capital adequacy ratio in Prelims 2018.

• In Mains, argue two ways: loss absorption must work; the power must be written in the text.

Recall in 60 seconds

• What are AT1 bonds? Perpetual Tier 1 bonds with cancellable coupons.

• RBI minimums? CET1 5.5%, Tier 1 7%, total 9%; 11.5% with buffer.

• Loss order? Equity, AT1, Tier 2, then depositors.

• Why quashed? The final scheme had no write-down clause.

Practice: Prelims MCQ

Consider the following statements:

Statement-I: AT1 bonds issued by Indian banks can be written down or converted into equity while the bank is still a going concern.

Statement-II: In the liquidation of a bank, AT1 bondholders have a senior claim over Tier 2 bondholders.

Which one of the following is correct in respect of the above statements?
(a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
(c) Statement-I is correct, but Statement-II is incorrect
(d) Statement-I is incorrect, but Statement-II is correct

Answer: (c) Statement-I is correct, but Statement-II is incorrect

Explanation:

Statement-I is correct: AT1 is written down or converted at a pre-specified trigger (CET1 of at least 6.125% of RWAs) or at PONV.

Statement-II is incorrect: AT1 ranks below Tier 2 and depositors in liquidation, above only equity.

Related PYQ (Prelims):
UPSC CSE Prelims 2018:
Consider the following statements:
1. Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues.
2. CAR is decided by each individual bank.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: (a) 1 only
The RBI sets the minimum, not each bank: 9% of RWAs, or 11.5% with the buffer.

See the detailed explanations: Prelims 2018 in the free PYQ vault, with year-wise analysis. Free to browse; free sign-up to download.

Practice: Mains question

In the light of the Supreme Court's ruling on Yes Bank's AT1 write-off, critically examine how India's bank-capital rules and resolution powers can protect financial stability without undermining creditor rights. (Answer in 250 words; 15 Marks)

Terms to know

• PONV: point of non-viability, when the RBI judges a bank cannot survive without capital support

• RWAs: risk-weighted assets, the base for every capital ratio

• CCB: Capital Conservation Buffer, an extra 2.5% of RWAs held as CET1

• QIB: qualified institutional buyer, such as a mutual fund or insurer

Frequently asked questions (FAQs)

What are AT1 bonds?

AT1 (Additional Tier 1) bonds are perpetual bonds issued by banks that count as Tier 1 capital. The bank can cancel their coupons, and they are written down or converted into equity at a trigger or PONV.

Why did the Supreme Court uphold the quashing of Yes Bank's AT1 write-off?

The final Reconstruction Scheme, 2020 had no clause allowing a write-down, and the administrator could not add one. The Court left AT1 loss absorption intact but required legal authority.

What is the difference between AT1 and Tier 2 bonds?

AT1 bonds are perpetual, count in Tier 1 up to 1.5% of RWAs and rank below Tier 2. Tier 2 bonds are dated, with a five-year minimum maturity, and count up to 2%.

What is the minimum capital adequacy ratio for banks in India?

The RBI requires CET1 of 5.5%, Tier 1 of 7% and total capital of 9% of RWAs, plus a 2.5% buffer in CET1. With the buffer, total capital must be 11.5%.

Related reading

• IDBI Bank strategic sale: disinvestment vs privatisation and RBI rules

• The RBI's calibrated tightening and the repo rate hike: the RBI's monetary role beside its role as bank regulator

• Practise previous-year Economy questions in the free PYQ vault

• Revise this month's current affairs in The Monthly Compass

• All Daily UPSC Briefs

Sources

• RBI: Commercial Banks (Prudential Norms on Capital Adequacy) Directions, 2025

• RBI: Master Circular on Basel III Capital Regulations (2014)

• SEBI: circular on AT1 instruments (October 2020)

• Bar and Bench: Supreme Court upholds quashing of Yes Bank's AT1 write-off (2026)

• FINMA: appeal against the Federal Administrative Court's AT1 decision (2025)

• BIS: Basel III framework

From The Daily UPSC Brief, 16 October 2026 — by Shivam Singh.