Bank capital
Functions of bank capital
Main functions
• Loss-absorbing function
• The confidence function
Secondary functions
• The financing function
Loss-absorbing
Tier 1 capital
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Share capital
Additional paid-in capital
Disclosed reserves
Retained earnings
Noncumulative trust preferred securities
Tier 2 capital
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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 can’t 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
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From Tier 1: Goodwill
From total capital:
1.
investment in unconsolidated banking and financial
subsidiary companies
Investments in the capital of other banks and other
financial institutions
2.
Capital adequacy ratio
T1  T 2
CAR 
RWA
RWA – Risk weighted assets
Tier 1 adequacy ratio
T 1ratio
T1
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RWA
Leverage
T1
Leverage 
Total _ Assets
Determining Risk-Weighted Assets
Calculation