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Tier 2 capital. Tier 2 capital, or supplementary capital, includes a number of important and legitimate constituents of a bank's capital requirement. [ 1][ note 1] These 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.
Subordinated debt. In finance, subordinated debt (also known as subordinated loan, subordinated bond, subordinated debenture or junior debt) is debt which ranks after other debts if a company falls into liquidation or bankruptcy . Such debt is referred to as 'subordinate', because the debt providers (the lenders) have subordinate status in ...
Subordinated debt is classed as Lower Tier 2 debt, usually has a maturity of a minimum of 10 years and ranks senior to Tier 1 capital, but subordinate to senior debt in terms of claims on liquidation proceeds.
Use. Capital adequacy ratio is the ratio which determines the bank's capacity to meet the time liabilities and other risks such as credit risk, operational risk etc. In the most simple formulation, a bank's capital is the "cushion" for potential losses, and protects the bank's depositors and other lenders. Banking regulators in most countries ...
In this instance, a venture bank might commit a $5 million loan (representing a 25% debt to equity, a comfortable ratio for most venture banks) available over an 18-month, interest-only advance ...
In addition, the intercompany loan must be subordinated to all subordinated debt and have the longest feasible maturity. The amount of these instruments, together with other cumulative preferred stock a bank holding company may include in Tier 1 capital, may constitute up to 25 percent of the sum of all core capital elements, including ...
Tier 2 capital represents "supplementary capital" such as undisclosed reserves, revaluation reserves, general loan-loss reserves, hybrid (debt/equity) capital instruments, and subordinated debt. Each country's banking regulator, however, has some discretion over how differing financial instruments may count in a capital calculation, because the ...
Because noncumulative perpetual debt can be counted as Tier 2 capital (supplementary capital), it is generally issued by banks as a way to maintain capital requirements (i.e. capital adequacy ratio or CAR). The debt is generally callable by the issuer at some point.
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