A tier-1 capital instrument is an instrument (capital instrument) that belongs to a bank’s common equity tier 1 capital (CET-1). It is any share, note or other security that constitutes tier 1 capital (T-1 capital).
The main examples of tier-1 capital instruments include:
- Common shares (portions of ownership in the bank, with the highest level of loss absorption capacity).
- Perpetual non-cumulative preference shares (these shares pay a fixed dividend but do not accumulate unpaid dividends if not distributed).
- Contingent convertible bonds (CoCos) (bonds that automatically convert into equity or are written off when certain trigger events occur, such as a drop in the bank’s capital ratio).
- Tier-1 capital instruments may also include those related to retained earnings (profits that are reinvested into the bank, contributing to its capital base).
