Tier 1 Capital

Banking

Quick Definition

Tier 1 Capital is a bank’s core capital, consisting of equity and disclosed reserves, used to absorb losses and ensure financial stability.

Detailed Explanation

Tier 1 Capital represents the strongest and most reliable form of capital a bank holds. It acts as a buffer to absorb losses without stopping operations.

It is a key component of the Capital Adequacy Ratio (CAR) and is regulated under Basel norms by central banks like the Reserve Bank of India.

Components of Tier 1 Capital

  • Equity share capital
  • Retained earnings
  • Disclosed reserves

Types of Tier 1 Capital

  • Common Equity Tier 1 (CET1): Highest quality capital
  • Additional Tier 1 (AT1): Includes instruments like perpetual bonds

Why Tier 1 Capital Matters

  • Ensures bank stability
  • Protects depositors
  • Absorbs financial losses

Tier 1 vs Tier 2 Capital

  • Tier 1: Core capital, highest quality
  • Tier 2: Supplementary capital (less secure)

Example

"A bank’s share capital and retained earnings form its Tier 1 Capital, used to absorb unexpected losses."

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