Bank capital

Functions of bank capital Main functions Loss-absorbing function The confidence function Secondary functions The financing function

Loss-absorbing

Tier 1 capital Share capital Additional paid-in capital Disclosed reserves Retained earnings Noncumulative trust preferred securities

Tier 2 capital Undisclosed Reserves Revaluation Reserves General Provisions Hybrid Instruments Cumulative preferred shares Long term subordinated debt

Hybrid (debt/equity) capital instruments This heading includes a range of instruments which combine characteristics of equity capital and of debt. Their precise specifications differ from country to country, but they should meet the following requirements: They are unsecured subordinated and fully paid-up They are not redeemable at the initiative of the holder or without the prior consent of the supervisory authority They are available to participate in losses without the bank being obligated to cease trading Although the capital instrument carry an obligation to pay interest that cant permanently be reduced, it should allow service obligations to be deferred where profitability of the would not support payment (like cumulative preferred shares)

Tier 3 capital Short – term subordinated liabilities (it may only cover market risk)

Limits and restrictions Total of Tier 2 elements should not exceed 100% of total of Tier 1 elements Subordinated term debts should not exceed 50% of total of Tier 1 elements

Deduction from the capital base From Tier 1: Goodwill From total capital: 1.investment in unconsolidated banking and financial subsidiary companies 2.Investments in the capital of other banks and other financial institutions

Capital adequacy ratio RWA – Risk weighted assets

Tier 1 adequacy ratio

Leverage

Determining Risk-Weighted Assets

Calculation