Share capital is a primary component of Tier 1 capital. It refers to the funds that a company raises in exchange for shares. It is a key measure of a company's liquidity and overall financial health. In the context of banking, share capital can be used to absorb losses, thereby protecting depositors and other creditors. It is considered a high-quality capital because it is fully paid-up and available to the bank without any obligations. Therefore, it provides a strong buffer against losses. Share capital is also permanent in nature, meaning it does not have a maturity date and is available to the bank as long as it is in operation. This permanence further enhances its ability to absorb losses. In addition, share capital is freely available to cover losses, as it is not encumbered by contractual or regulatory obligations that could limit its availability in times of stress.

Choice A is incorrect. Subordinated debt is a component of Tier 2 capital.

Choice C is incorrect. Goodwill, while an asset on a company's balance sheet, is not included in Tier 1 capital calculations. This is because goodwill can be highly subjective and difficult to accurately value, making it less reliable as an indicator of financial strength.

Choice D is incorrect. General loan loss reserves is a component of Tier 2 capital.

Things to Remember

• Retained earnings are profits that a company has earned but not distributed to its shareholders. They can be an important component of a bank's capital structure.

• Regulatory capital requirements are set by regulatory bodies to ensure that banks