Tier 2 capital

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Tier 2 capital is a measure of a bank's financial strength with regard to the second most reliable form of financial capital from a regulatory point of view. The forms of banking capital were largely standardized in the Basel I accord, issued by the Basel Committee on Banking Supervision and left untouched by the Basel II accord. National regulators of most countries around the world have implemented these standards in local legislation.

Tier 1 capital is considered the more reliable form of capital, which comprises the most junior (subordinated) securities issued by the firm. These include equity and qualifying perpetual preferred stock.

There are several classifications of tier 2 capital. In the Basel I Accord, tier 2 capital is composed of supplementary capital, which is categorised as undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated term debt. Supplementary capital can be considered tier 2 capital up to an amount equal to that of the core capital.

Undisclosed Reserves

Undisclosed reserves are not common, but 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...
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