Financial News: Reform of Subordinated Instrument Regulation: A Concept for Discussion.

The Bank of Russia has developed new approaches to regulating subordinated instruments of credit organizations. The innovations are designed to increase banks’ ability to independently restore adequate capital in stress, as well as significantly expand the possibilities for attracting subordinated debt by enhancing its investment appeal.

Key innovations for banks:

• Increase in the capital adequacy level (trigger) at which the write-down/conversion of subordinated debt included in additional capital (AT1) occurs. Banks will be able to more quickly initiate mechanisms to replenish basic capital and smooth the effect of credit contraction in stress situations.
• Limitation on the accrual and payment of interest if the capital adequacy ratio falls below a certain level (N1.1 – 7.5%; N1.2 – 9%; N1.0 – 11%). This will allow banks to save capital when it is most needed.
• Ban on attracting subordinated additional capital instruments (T2) for systemically important credit organizations (SICOs). T2 instruments activate late, when N1.1 decreases to 2%. For SICOs, reducing the adequacy to such a level is unacceptable. Replacing these instruments with new AT1 will increase the financial stability of such banks and reduce systemic risks.

Key innovations for investors:

• The possibility of restoring the AT1 nominal after write-off, if the bank’s financial stability has improved. This will allow the bank to maintain investor confidence and create an additional motivation for them to invest in such instruments.
• For subordinated instruments with a floating rate, its maximum value is increased to the level of “key rate + 10 percentage points.” The rate is raised to maintain the investment attractiveness of the instrument for the investor.
• The waiver of the mandatory condition of perpetuity for AT1 will be a minimum term of 10 years. This will increase the attractiveness of the instrument for those investors who are not ready to “lock up” their investments indefinitely.

To avoid creating excessive pressure on bank capital, the planned regulation will apply only to new subordinated instruments.

Some of the innovations will require amendments to the legislation. To enable banks to have the opportunity to attract capital sooner, the innovations can be implemented in two stages. In the first stage (by January 2027), it is planned to prepare a regulatory framework that will allow banks to issue subordinated instruments with new triggers and rates. In the second stage — to make amendments to the legislation (abolition of perpetuity, possibility of reinstatement, prohibition on attracting T2 for OJSCs), which may be adopted already in the first quarter of 2028.

Read more in the newsreform conceptsRegulation of subordinated instruments. Answers to the questions presented in the report, as well as comments and suggestions, can be sent to the Bank of Russia until July 15, 2026, inclusive.

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