Analyze the structural classification of capital under Basel III norms. Which of the following is categorized as 'Tier 1 Capital' for a commercial bank?

💡 Solution & Explanation

Tier 1 capital under Basel III comprises Common Equity Tier 1 capital, which includes common shares and retained earnings, alongside additional tier 1 capital instruments such as perpetual non-cumulative preference shares and qualifying contingent convertible bonds. Tier 1 capital represents the highest-quality, most loss-absorbing capital of a bank, capable of absorbing losses on a going-concern basis. In contrast, Tier 2 capital includes subordinated debt and general provisions, which absorb losses only when a bank is wound up. A related prudential requirement is the Capital Conservation Buffer, which banks must maintain above minimum capital ratios.