MANILA – The Bangko Sentral ng Pilipinas (BSP) is set to introduce stricter regulations on the early redemption of banks’ Additional Tier 1 (AT1) capital notes—also known as hybrid perpetual securities—in a bid to prevent sudden capital erosion and enhance financial system resilience. The proposed guidelines, under review as of December 23, 2025, will require banks to secure BSP approval before redeeming these instruments ahead of schedule, even if call options are embedded in the terms.
AT1 notes are high-yield, loss-absorbing securities counted as core capital under Basel III standards, designed to convert to equity or be written down during stress events. The new rules address concerns that premature redemptions—often triggered by falling interest rates—could weaken banks’ capital buffers at inopportune times.
BSP Governor Eli Remolona Jr. explained the rationale: “We want to ensure that redemption does not compromise a bank’s ability to absorb losses or meet capital requirements, especially in a volatile environment.” Key proposals include:
- Prior Approval Mandatory: Even for contractual call options (typically after 5-10 years).
- Stress Testing: Banks must demonstrate post-redemption capital ratios remain above regulatory minima, including buffers.
- Market Conditions Review: Redemptions disallowed if they risk systemic instability.
The move follows global precedents (e.g., Singapore and Hong Kong tightening AT1 rules post-Credit Suisse collapse) and comes as Philippine banks hold billions in outstanding AT1 notes issued during high-rate periods. Analysts see it as preemptive, with no immediate redemptions flagged.
For banks, this limits flexibility in liability management but strengthens long-term stability. For investors, it reduces call risk—potentially lowering yields on new issuances.
In a banking sector navigating rate cuts and growth ambitions, this BSP tweak isn’t restriction—it’s reinforcement, ensuring capital stays where it’s needed most.
AT1 Notes Snapshot (Philippine Context):
| Aspect | Current Practice | Proposed Change |
|---|---|---|
| Redemption | Contractual call after 5-10 years | BSP prior approval required |
| Capital Impact | Reduces Tier 1 | Must maintain ratios post-call |
| Global Precedent | Post-Credit Suisse reforms | Similar to Singapore/HK models |
