Components of Tier 2 Capital include subordinated debt and general loan loss reserves are components. Subordinated debt refers to unsecured, unguaranteed debt instruments that are subordinated to depositors and other creditors. These instruments must have a maturity of five or more years and can only be called after five or more years. On the other hand, general loan loss reserves are not allocated to absorb losses on specific positions. They include capital limited at 1.25% of standardized approach Risk-Weighted Assets (RWAs) or 0.6% of Internal Ratings-Based (IRB) RWAs.

A and C are incorrect. These are components of Tier 1 Capital.
D is incorrect. This is a component of Additional Tier 1 Capital

Things to Remember

• Basel III is a global regulatory framework on bank capital adequacy, stress testing, and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision.
• Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view, consisting of common equity and disclosed reserves.
• Tier 2 capital is supplementary capital that includes items such as subordinated debt, general loan loss reserves, hybrid instruments, and other undisclosed reserves.
• General loan loss reserves are provisions set aside by banks to cover potential losses from non-performing loans and are part of Tier 2 capital.
• Approved minority interest not included in Core Tier 1 is a component of Additional Tier 1 capital, not Tier 2 capital.