Regulatory reform of subordinated instruments: concept for discussion
The Bank of Russia has devised new approaches to regulating credit institutions’ subordinated instruments. The innovations will increase banks’ capability to restore their capital adequacy in stress conditions and notably expand their opportunities to raise subordinated debt by making this option more attractive to investors.
Key innovations for banks:
- Increasing the capital adequacy level which triggers the write-off / conversion of subordinated debt included in Additional Tier 1 capital (AT1). Banks will be able to launch mechanisms for restoring common equity faster and thus smooth out the effect of a credit crunch in a stress scenario.
- Limiting the amount of interest accrued and paid if a bank’s capital adequacy ratio is below a threshold (N1.1 – 7.5%; N1.2 – 9%; N1.0 – 11%). Banks will thus be able to save capital when they need it the most.
- Prohibiting systemically important credit institutions (SICIs) from raising subordinated Tier 2 instruments (T2). T2 instruments produce an effect with a delay when N1.1 drops to 2%, while such a decline is unacceptable to SICIs. Replacing these instruments with new AT1 ones will enhance these banks’ financial resilience and mitigate systemic risks.
Key innovations for investors:
- The option of restoring the nominal value of AT1 after the write-off if the bank’s financial resilience has improved. This will help the bank preserve investors’ confidence and encourage them to invest in such instruments.
- As for subordinated instruments at a variable interest rate, its maximum value increases to the level of the key rate plus 10 percentage points. A higher interest rate will make such instruments more attractive to investors.
- Cancelling the mandatory condition of permanency for AT1 – the minimum tenure will be 10 years. This will make the instrument more attractive to those investors who are not willing to lock their funds for an indefinite period.
To avoid excess pressure on banks’ capital, the planned regulation will only apply to subordinated instruments.
A number of these innovations will require amendments to laws. For banks to be able to raise capital sooner, the innovations may be implemented in stages. The first stage (by January 2027) is preparing a legal framework that will enable banks to issue subordinated instruments with new triggers and new interest rates. The second stage is introducing amendments to laws (cancellation of the perpetual tenure, the option of restoration, the ban on raising T2 for SICIs) that may be adopted as early as 2028 Q1.
More details are available in the concept of the regulatory reform of subordinated instruments. The Bank of Russia welcomes feedback on the consultation paper through 15 July 2026.