The capital has two components:

1. Tier 1: This consists of items such as equity and noncumulative perpetual preferred stock. (Goodwill is subtracted from equity.)
2. Tier 2: This is sometimes referred to as Supplementary Capital. It includes instruments such as cumulative perpetual preferred stock, certain types of 99-year debenture issues, and subordinated debt (i.e. debt subordinated to depositors) with an original life of more than five years.

In this example, Tier 1 = Equity (150m); and Tier 2 = Subordinated debt (50m) + Cumulative preferred stocks (20m) = 70m

Things to Remember

• Basel I regulations were the first international set of regulations on bank capital adequacy and were introduced by the Basel Committee on Banking Supervision in 1988.
• Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It consists of shareholders' equity, retained earnings, and some types of preferred shares.
• Tier 2 capital is supplementary capital that includes items such as subordinated debt, hybrid instruments, and other forms of less permanent capital.