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Identify at least three types of Tier 1 and Tier 2 capital.

Identify at least three types of Tier 1 and Tier 2 capital.

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Answer #1

As per Basel Accord, bank has to maintain a certain percentage of its risk-weighted assets in order to ensure enough capital on hand to handle obligations. That ratio is called as Capital Adequacy Ratio (CAR). This ratio helps to measure the capital adequacy of banks. It involves Tier 1 and Tier 2 capital

The primary funding source of the bank is termed as Tier 1 capital. Types of Tier 1 capital are shareholders equity, retained earnings and disclosed reserves.

Tier 2 capital is the second layer of capital that banks are required to keep as part of reserves. Three types of Tier 2 capital are general or undisclosed reserves, subordinated term debt and hybrid capital instruments.

The Basel Norms has introduced Tier 3 capital also after this.

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