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Tier 2 capital: Wikis


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Tier 2 capital is a measure of a bank's financial strength with regard to the second most reliable form of financial capital, from a regulator's point of view. The forms of banking capital were largely standardised in the Basel I accord, issued by the Basel Committee on Banking Supervision and left untouched by the Basel II accord. National regulators of most countries around the world have implemented these standards in local legislation.

Tier 1 capital is considered the more reliable form of capital.

There are several classifications of tier 2 capital. In the Basel I Accord, tier 2 capital is composed of supplementary capital, which is categorised as undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated term debt. Supplementary capital can be considered tier 2 capital up to an amount equal to that of the core capital.[1]


Undisclosed Reserves

Undisclosed reserves are not common, but are accepted by some regulators where a bank has made a profit but this has not appeared in normal retained profits or in general reserves of the bank.

Revaluation Reserves

A revaluation reserve is a reserve created when a company has an asset revalued and an increase in value is brought to account. A simple example may be where a bank owns the land and building of its head-offices and bought them for $100 a century ago. A current revaluation is very likely to show a large increase in value. The increase would be added to a revaluation reserve.

General Provisions

A general provision is created when a company is aware that a loss may have occurred but is not sure of the exact nature of that loss. Under pre-IFRS accounting standards, general provisions were commonly created to provide for losses that were expected in the future. As these did not represent incurred losses, regulators tended to allow them to be counted as capital.

Hybrid Instruments

Hybrids are instruments that have some characteristics of both debt and shareholders' equity. Provided these are close to equity in nature, in that they are able to take losses on the face value without triggering a liquidation of the bank, they may be counted as capital. Preferred stocks are hybrid instruments.

Subordinated Term Debt

Subordinated debt is debt that ranks lower than ordinary depositors of the bank.

See also


  1. ^ The attached Basel Capital Accord shows the definitions of supplementary capital and tier 2 capital in page 4, section "The constituents of capital (b) Supplementary capital". The relationship with the capital base is shown in Annex 1.
    "Basle Capital Accord. International Convergence of Capital Measurement and Capital Standards (July 1988, updated to April 1998)". Retrieved 2008-11-30. 

External links

  • Practical articles, on BIS2 and risk modelling, submitted by professionals to help create an industry standard.


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