- 1 Basel Norms
- 2 Differences Between Tier 1 and Tier 2 Capital Under Basel III
- 2.1 What are the Basel Accords, and how many series of regulations do they comprise?
- 2.2 What Basel norms does the Indian banking system currently follow?
- 2.3 What are the key requirements under Basel III regarding capital adequacy?
- 2.4 What is Tier-1 capital, and what does it comprise?
- 2.5 What is Tier-2 capital, and why is it considered less reliable than Tier-1 capital?
- 3 More Articles
Basel Norms
The Basel Accords are 3 series of banking regulations (Basel I, II, and III) set by the Basel Committee on Bank Supervision (BCBS). Presently the Indian banking system follows Basel II norms.
- Under Basel III, a bank’s tier 1 and tier 2 assets must be at least 10.5% of its risk – weighted assets.
- Tier-1: Primary funding source of the bank; Consists of shareholders’ equity and retained earnings.
- Tier-2: includes revaluation reserves, hybrid capital instruments and subordinated term debt, general loan – loss reserves, and undisclosed reserves.
- Tier-2 capital is considered less reliable than Tier-1 capital because it is more difficult to accurately calculate and more difficult to liquidate
Differences Between Tier 1 and Tier 2 Capital Under Basel III
| Aspect | Tier 1 Capital | Tier 2 Capital |
|---|---|---|
| Definition | Consists of shareholders’ equity and retained earnings | Includes revaluation reserves, hybrid capital instruments, subordinated term debt, general loan-loss reserves, and undisclosed reserves |
| Importance | Primary funding source of the bank | Supplementary to Tier 1 capital |
| Reliability | More reliable | Less reliable |
| Calculation | Easier to calculate | More difficult to accurately calculate |
| Liquidation | Easier to liquidate | More difficult to liquidate |
What are the Basel Accords, and how many series of regulations do they comprise?
The Basel Accords are a series of banking regulations set by the Basel Committee on Bank Supervision (BCBS). They consist of three series: Basel I, Basel II, and Basel III, each providing guidelines for banking supervision and risk management.
What Basel norms does the Indian banking system currently follow?
Presently, the Indian banking system follows Basel II norms, which provide guidelines for capital adequacy, risk management, and supervisory review.
What are the key requirements under Basel III regarding capital adequacy?
Under Basel III, a bank’s tier 1 and tier 2 assets must be at least 10.5% of its risk-weighted assets. This ensures that banks maintain sufficient capital to absorb potential losses and maintain financial stability.
What is Tier-1 capital, and what does it comprise?
Tier-1 capital is the primary funding source of a bank and consists of shareholders’ equity and retained earnings. It represents the highest quality capital and provides a cushion against losses.
What is Tier-2 capital, and why is it considered less reliable than Tier-1 capital?
Tier-2 capital includes revaluation reserves, hybrid capital instruments, subordinated term debt, general loan-loss reserves, and undisclosed reserves. It is considered less reliable than Tier-1 capital because it is more difficult to accurately calculate and more challenging to liquidate in times of financial distress.
