Explanation:
Under Basel I, Tier 1 (core) capital consists of equity capital and disclosed reserves, which includes common stock and noncumulative perpetual preferred stock. Tier 2 (supplementary) capital includes items such as undisclosed reserves, revaluation reserves, general provisions, hybrid instruments, and subordinated term debt (with an original maturity of over 5 years). Therefore, Tier 1 includes equity and noncumulative perpetual preferred stocks, while Tier 2 includes subordinated debt.
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Q.2338 Kediray Bank from Izmir, Turkey is calculating its regulatory capital under Basel I regulations. It has the following capital instruments: equity, noncumulative perpetual preferred stocks, and subordinated debt with a maturity of over 5 years. What is the structure of its regulatory capital?
A
Tier 1 capital includes equity, noncumulative perpetual preferred stocks, and subordinated debt.
B
Tier 1 capital includes equity, and Tier 2 capital includes noncumulative perpetual preferred stocks and subordinated debt.
C
Tier 1 capital includes equity, and Tier 2 includes noncumulative perpetual preferred stocks; subordinated debt is not included in regulatory capital.
D
Tier 1 capital includes equity, noncumulative perpetual preferred stocks, and Tier 2 includes subordinated debt.
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