Economics • Banking & FinanceMedium
Under the regulatory framework of the Reserve Bank of India, what does the term 'Tier-2 Capital' primarily consist of in the calculation of a bank's capital adequacy?
A. Common equity tier and disclosed reserves
B. Supplementary capital items such as general provisions, subordinated debt, and revaluation reserves✓ Correct Answer
C. Unsecured retail deposits maturing within one year
D. Government securities held under the Held-For-Trading category
💡 Solution & Explanation
Tier-2 capital functions as supplementary capital under Basel capital adequacy guidelines, incorporating general loan-loss provisions, hybrid instruments, and subordinated debt to absorb unexpected losses during bank liquidation. Unlike Tier-1 capital, which consists of permanent equity and disclosed reserves, Tier-2 offers secondary loss-absorbing capacity.
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