2016-FRR Exam Dumps | According to Basel II what constitutes Tier 2 capital?

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GARP.2016-FRR.v2024-09-09.q145
Question 10

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Question 10/145

According to Basel II what constitutes Tier 2 capital?

A. Debt that is not subordinated to equity and innovative capital products that would count as Tier 1 capital and excluding perpetual non-cumulative preference shares.

B. Debt that is subordinate to equity.

C. Equity capital and debt together.

D. Core capital excluding undisclosed reserves and general reserves that the bank may make against its expected loan losses.

Correct Answer: B

Under Basel II, Tier 2 capital, also known as supplementary capital, includes:
* Subordinated Debt: This type of debt ranks below other debts with respect to claims on assets or earnings. It is considered Tier 2 capital because it can absorb losses in the event of a winding-up of the bank.
* Other Instruments: This category can also include hybrid instruments, undisclosed reserves, revaluation reserves, and general provisions/general loan-loss reserves.
These components enhance the bank's ability to absorb losses beyond the protection provided by Tier 1 capital.References: How Finance Works, sections explaining the structure and components of Tier 2 capital under Basel II.

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