ECB Paper Flags Reverse Convertible as Option to Replace AT1 (1)

Reverse convertible bonds should be explored as potential replacements or complements for the bonds that banks sell to raise Additional Tier 1 capital, according to a working paper published by the European Central Bank.

AT1s bonds, also known as contingent convertibles due to their structure, typically convert into equity once a bank’s core capital ratios fall below a predetermined value. They came under scrutiny after a government-brokered takeover of Credit Suisse by UBS Group AG in 2023 led to the wipeout of about $17 billion of AT1s.

“Although very similar in structure, reverse convertibles avoid the problems associated with ...