Tier 2 is a ratio also called supplemental capital that includes a number of important components in a bank's capital. Another way of calling it is Second Category Own Resources.
Tier 2 is made up of those elements that will absorb losses when the entity is not solvent.
The types of capital that make up Tier 2 were clearly defined in the Basel Accords. These international agreements have been applied by regulatory bodies at the national level.
On the one hand, Tier 1 is made up of the so-called quality capital, that is, it is made up of those instruments capable of absorbing losses when the entity is in operation. Instead, Tier 2 will be made up of elements that absorb losses when the entity is not viable.
Tier 2 Components
The Tier 2 components are:
- Reserves for regularization, updating or revaluation of assets. These are reserves created when an asset is revalued and that increase in value is accounted for.
- Social work funds of savings banks and education and promotion funds of credit cooperatives materialized in real estate.
- Capital stock of non-voting shares.
- Subordinated financing (up to 50% of the entity's basic equity). This is the debt that occupies the lowest place of the depositors of a bank. Only subordinated debt with a maturity term of more than five years may be included. They are called hybrids, since banks owe money to those who have bought that debt, but at the same time they can include it in their accounting books as capital.
- General provision against unidentified losses. Said reservation must meet the following requirements:
- 1.25% of risk-weighted assets for banks using the standard approach.
- 0.6% of risk-weighted assets for banks using the IRB approach.
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