Which of the following statements with regard to classification of a bank’s regulatory capital under Basel...

Which of the following statements with regard to classification of a bank’s regulatory capital under Basel III is true?

I Tier 1 capital includes retained earnings and surpluses resulting from the issue of common shares, but not mandatory convertible bonds

II Common Equity Tier 1 (CET1) capital includes retained earnings and surpluses resulting from the issue of common shares, but not contingent convertible bonds

III Tier 1 capital includes retained earnings and surpluses resulting from the issue of common shares, but not contingent convertible bonds

IV Common Equity Tier 1 (CET1) capital includes retained earnings and surpluses resulting from the issue of common shares, but not mandatory convertible bonds

Select one:

II, III, and IV

I, II, and IV

I, II, and III

I, III, and IV

II and III

Expert Solution

According to BASEL III

Tier 1 Capital is the primary funding source of the banks. Higher the Tier 1 Capital better the condition of the bank to bear losses in times of financial distress. There is a difference between the Tier 1 capital and Common Equity Tier 1- Tier 1 capital includes the equity,its reserve and non cumulative and non convertible preferred stock whereas the Common Equity Tier 1 includes the equity and its reserve and nothing related to preferred stock.Tier 1 capital is regraded as the primary source of the funding. These funds can be used by the bank in situation of financial distress to absorb losses so that normal activities i.e., day to day functioning of the banks doesnt stop.

So it can be concluded that Tier 1 capital comprises of retained earnings and surpluses resulting from the issue of common shares, but not contingent convertible bonds.

Common Equity Tier 1 capital comprises of retained earnings and surpluses resulting from the issue of common shares, but not mandatory convertible bonds and contingent convertible bonds.

So second option that is I,II and III is true with regard to classification of a bank’s regulatory capital under Basel III.

jeff jeffy answered 1 year ago

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