sources of bank funds
Bank Capital Components
Tier 1:
Tier 1 is used to describe the capital adequacy of a bank. It is the core measure of a bank’s financial strength from a regulators point of view. It includes equity capital and disclosed reserves. It also may include non-redeemable non-cumulative preferred stock.
A comparison between a banking firm’s core equity capital and total risk-weighted assets called the tier 1 ratio. It is the ratio of a bank’s core equity capital to its total risk-weighted assets (RWA). Risk-weighted assets are the total of all assets held by the bank weighted by credit risk. Most of the central banks follow the BASEL Committee on banking supervision guidelines in setting formulae for asset risk weights. There are two different conventions for calculating and quoting the tier 1 capital ratio. They are tier 1 common capital ratio and tier 1 total capital ratio.
Tier 2:
Tier 2 includes a number of important and legitimate constituents of a bank’s capital base. It is a supplementary bank capital that includes items such as revaluation reserves, undisclosed reserves, hybrid instruments and subordinate term debt.
Revaluation reserve is a reserve created when a company has an asset revalued and an increase in value is brought to account. On the other hand undisclosed reserves 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 a bank. They must be accepted by the bank’s supervisory authorities. Hybrids are instruments that have some characteristics of both debt and equities. They are able to take losses on the face value without triggering a liquidation of the bank; they may be counted as a capital. The other item is the subordinate term debt. It the debt that ranks lowers than ordinary depositors of the bank. Only those with a minimum original term to maturity of five years can be included in the calculations of this form
Tier 1:
Tier 1 is used to describe the capital adequacy of a bank. It is the core measure of a bank’s financial strength from a regulators point of view. It includes equity capital and disclosed reserves. It also may include non-redeemable non-cumulative preferred stock.
A comparison between a banking firm’s core equity capital and total risk-weighted assets called the tier 1 ratio. It is the ratio of a bank’s core equity capital to its total risk-weighted assets (RWA). Risk-weighted assets are the total of all assets held by the bank weighted by credit risk. Most of the central banks follow the BASEL Committee on banking supervision guidelines in setting formulae for asset risk weights. There are two different conventions for calculating and quoting the tier 1 capital ratio. They are tier 1 common capital ratio and tier 1 total capital ratio.
Tier 2:
Tier 2 includes a number of important and legitimate constituents of a bank’s capital base. It is a supplementary bank capital that includes items such as revaluation reserves, undisclosed reserves, hybrid instruments and subordinate term debt.
Revaluation reserve is a reserve created when a company has an asset revalued and an increase in value is brought to account. On the other hand undisclosed reserves 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 a bank. They must be accepted by the bank’s supervisory authorities. Hybrids are instruments that have some characteristics of both debt and equities. They are able to take losses on the face value without triggering a liquidation of the bank; they may be counted as a capital. The other item is the subordinate term debt. It the debt that ranks lowers than ordinary depositors of the bank. Only those with a minimum original term to maturity of five years can be included in the calculations of this form