Tier 2 Capital
Reviewed by Sep 30, 2020| Updated on
Tier 2 capital is a component of the bank capital. It consists of the bank's supplementary capital including undisclosed reserves, revaluation reserves, and subordinate debt. Tier 2 capital is less secure than Tier 1 capital.
What is Tier 2 Capital?
The norms for Tier 1 and Tier 2 capital are specified in the banking regulations made by the Basel Committee on Bank Supervision. The norms are prescribed to ensure that banks are adequately capitalised.
Tier 2 capital is the secondary component of bank capital. The capital requirements are governed by international banking regulations set under Basel norms.
Further About Tier 2 Capital
The capital reserve ratio for a bank is prescribed at 8%. It stands at 6% for Tier 1 capital and the balance 2% for Tier 2 capital. Usually, a bank's capital ratio is calculated by dividing its capital by its total risk-based assets.
Tier 2 capital consists of 2 sub-categories:
Upper Tier 2 Capital: It consists of fixed asset investments, revaluation reserves, and perpetual securities.
Lower Tier 2 Capital: It consists of subordinated debt with a minimum of five-year maturity.
Tier 2 capital also consists of hybrid capital instruments, which have the character of both equity and debt. It is characterised by being inexpensive for a bank to issue, with coupons that are not deferrable without triggering a default.
Tier 2 capital is variable and supplementary in nature compared to Tier 1 capital which is the core capital of the bank.
Revaluation reserves are reserves created upon the revaluation of an asset. A typical revaluation reserve is like a building owned by a bank. With passing time, the value of the real estate asset tends to increase whose value is captured upon revaluation of the asset.
Hybrid instruments may be part of the Tier 2 capital as long as the assets are sufficiently similar to equity and do not trigger a liquidation of the bank.
Employee Provident Fund
The Employee Provident Fund (EPF) is a retirement benefits scheme in which employees of an organisation contribute a small portion of their basic pay monthly. Read more
Cost of Funds
The cost of funds is the interest rate that financial institutions are paying on the funds they use in their business. Read more
If you have a savings or current account and if you have not made any transactions for more than 12 months through it, the account will be listed as an inactive account. Read more
Showrooming refers to the practice of checking out a product in a retail store before buying it from online retailers. Read more
An inflexible expense is an expense that cannot be skipped or adjusted by a company or an individual. Read more
Credit references can be treated as a credit report, or a written letter from a previous lender, or personal/business acquaintance. Read more