Types of Capital
The Basel rules recognize that different types of equity are more important than others. To recognize this, different adjustments are made:
- Tier I Capital: Actual contributed equity plus retained earnings.
- Tier II Capital: Preferred shares plus 50% of subordinated debt.
Different minimum CAR ratios are applied: minimum Tier I equity to risk-weighted assets may be 4%, while minimum CAR including Tier II capital may be 8%.
There is usually a maximum of Tier II capital that may be "counted" towards CAR, depending on the jurisdiction.
Read more about this topic: Capital Adequacy Ratio
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