Question

    All of the following are considered under Tier II

    capital of a bank, except ________
    A Revaluation reserves Correct Answer Incorrect Answer
    B Subordinate debt Correct Answer Incorrect Answer
    C Cumulative Preference capital Correct Answer Incorrect Answer
    D Innovative perpetual debt Correct Answer Incorrect Answer
    E Undisclosed reserves Correct Answer Incorrect Answer

    Solution

    Tier II capital is one of the components of regulatory capital of a bank. It is also known as supplementary 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 II capital consists of:

    • undisclosed reserves,
    • revaluation reserves,
    • general provisions and loss reserves,
    • hybrid capital instruments (debt capital instruments, perpetual cumulative preference shares/ Redeemable Non-Cumulative Preference Shares / Redeemable Cumulative Preference Shares)
    • subordinated debt
    • investment reserve account
    Perpetual Non-cumulative Preference Shares and Innovative Perpetual Debt Instruments (IPDI) are eligible for inclusion as Tier I capital.

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