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Question

In terms of banking capital reserve, Tier II's capital loss absorption capacity is____ that of Tier I capital.  

A Higher than Correct Answer Incorrect Answer
B Lower than Correct Answer Incorrect Answer
C Equal to Correct Answer Incorrect Answer
D Equal to or higher than Correct Answer Incorrect Answer
E Equal to or lower than Correct Answer Incorrect Answer

Solution

Tier II is the supplementary capital. It is considered to be gone concern capital. Tier II items qualify as regulatory capital to the extent that they can be used to absorb losses arising from a bank's activities. Tier II's capital loss absorption capacity is lower than that of Tier I capital. Tier 1 capital is considered to be the going concern capital. The going concern capital allows a bank to continue its activities and keeps it solvent. The highest quality of Tier 1 capital is called common equity tier 1 (CET1) capital.

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