IGNOU MS 494 2017 - What are the elements of Tier I and Tier II Capital and what are their

Question

What are the elements of Tier I and Tier II Capital and what are their limits ? What are the deductions to be made from Capital under Tier I
and Tier II ?

20 Apr 2018

Answer :

Word Count : 463

In the realm of banking and finance, Tier I and Tier II capital play crucial roles in determining a bank's financial strength and its ability to withstand unexpected losses. These tiers constitute the regulatory capital required by financial institutions to ensure stability and solvency. Let's delve into their elements, limits, and deductions.

### Tier I Capital:

Elements:

1. Common Equity Tier I (CET1) Capital: This includes the bank's common shares, retained earnings, and some additional elements like certain regulatory adjustments.
2. Additional Tier I Capital: Instruments such as non-cumulative preferred stock, certain contingent convertible instruments, and other capital instruments that absorb losses in case of a bank's financial distress.

Limits:
Regulatory authorities stipulate a minimum requirement for Tier I capital to be maintained as a percentage of a bank's risk-weighted assets (RWA). This requirement ensures that banks have a substantial cushion to absorb losses.

Deductions:

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