Tier 2 Capital
Candlefocus EditorTier 2 capital includes both subordinated debt and hybrid capital instruments, each of which serves as supplementary sources of additional protection to the bank's assets. Subordinated debt is a loan from a third party, with a less stringent repayment schedule. These loans provide additional funding that can be used to supplement Tier 1 capital in the event of losses, giving the bank more resources to use when dealing with the issue.
Hybrid capital instruments, however, are a more complex form of capital. They are a blend of debt and equity that provide the bank with an additional layer of protection. This protection comes in the form of being non-contingent or "conservation-minded," meaning they can be written down if the bank suffers losses, reducing the losses taken.
Finally, revaluation reserves and general provisions are also included in Tier 2 capital. These comprise a set of rules and regulations designed to protect the bank in the event of losses. Revaluation reserves are created when a bank books profits on the investments it holds. When this happens, the bank must set aside a reserve to protect the profits in the event of losses.
General provisions consist of amounts set aside as a general reserve from which losses can be made if the bank suffers from severe losses. This reserve can also be used to purchase new assets or increase existing ones, providing the bank with additional liquidity and protection.
In today's competitive banking landscape, it is essential for banks to have an adequate reserve of Tier 2 capital to protect themselves from unforeseen losses. This form of capital is not just a means for protecting banks from losses, but also serves as a critical source of revenue that banks can use to purchase new assets and increase existing ones, providing them with an additional cushion of protection. Through using Tier 2 capital, banks can ensure they have reliable sources of funding and protection in the event of unexpected losses.