A security that forms a component of equity capital (core capital) including ordinary equity (ordinary shares, common stock), both voting and non-voting, and preferred shares/ preference shares. Capital securities also include debt-like convertible or hybrid financial instruments (with a feature of conversion into equity). The purpose of a bank’s core capital is to absorb unexpected losses and maintain the solvency of the bank so that it continues operating (business as usual).

As a regulatory capital, capital securities (capital instruments) consist of an unlimited amount of equity (core capital) and a limited amount of other instruments- i.e., certain types of financial instruments (hybrid capital instruments or simply, hybrids). Hybrid instruments have the characteristics of both equity and debt. For example, a specific type of hybrid may pay a regular dividends based on a par value (like a coupon), but may be considered equity for regulatory purposes, having the ability to absorb unexpected losses.

Differently stated, a capital instrument is any instrument contributing to total available regulatory capital, which consists of tier 1 capital, comprising CET1 and AT1, and tier 2 capital. Capital instruments imply total capital instruments (i.e., tier 1 and tier 2 capital instruments).

Classified as equity instruments, a certain type of capital securities, namely: perpetual capital securities, are those with no maturity date and where the distribution payments (coupon, dividends) can be deferred at the discretion of the issuer. In other words, perpetual capital securities are assumed to continue without a set redemption date, and hence are classified as equity because they are not redeemable (option to redeem at the discretion of the issuer) and distributions (coupon payments) are also left for discretion of the issuer. Any redemption of the these securities by the issuer, under certain circumstances, will be subject to the issuer obtaining the prior approval of relevant regulatory authorities (e.g., central banks).