Explanation:
Under Basel I regulations, regulatory capital is composed of two tiers:
Therefore, equity and noncumulative perpetual preferred stocks belong to Tier 1 capital, whereas subordinated debt with a maturity of over 5 years is classified under Tier 2 capital.
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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.