Undisclosed reserves are funds held by a financial institution which are not visible or stated on their financial statements. They are kept ‘hidden’ from public view and include certain specific accounts such as loan-loss reserves, revaluation reserves and other reserves. While these reserves are known to the bankers and their auditors, the general public will not be able to view them.

Only some countries recognize undisclosed reserves as assets. Other regulatory agencies around the world tend to offer only limited visibility of the funds. As a result, undisclosed reserves are still far from being generally accepted as a legitimate form of capital recognition.

The primary purpose of keeping funds in undisclosed reserves is to ensure the future stability of a financial institution and provide a source of ready capital in times of economic turmoil or in the event of an emergency. By keeping these funds separate from the ones declared on financial statements, Banks and other Financial Institutions can remain functional in the event of a significant financial shock.

Undisclosed reserves are generally held in the form of cash, government securities, and bonds. In some cases, they may also include corporation shares, insurance investments and other instruments. They must not exceed 33% of the total regulatory capital of the institution in order to be counted as Tier 2 Capital.

It is important to note that undisclosed reserves are not the same as hidden compensation, which is defined as either payments provided directly to certain key employees or payments that are masked or unreported in such a manner that the true intent of the payment is hidden from regulators.

To summarize, undisclosed reserves are funds held by a financial institution and kept ‘hidden’ from public view. They are not listed on the institution’s financial statements and are included in Tier 2 capital. Undisclosed reserves are meant to provide a source of ready capital in times of economic crisis while also helping to keep the institution viable. Despite the advantages they offer, they are still viewed as controversial by some regulators and have not been universally accepted as assets.