Examine the Basel III capital regulations implemented for commercial banks. What constitutes 'Tier 2 Capital' within this regulatory framework?

💡 Solution & Explanation

Under Basel III norms, bank capital is split into Tier 1 capital, representing highest quality going-concern loss absorption capacity consisting of common equity and qualifying preferred stock, and Tier 2 capital, representing gone-concern supplementary capital. Tier 2 instruments include subordinated debt, general loan-loss provisions, and hybrid capital instruments that absorb losses when a bank is winding up or facing severe distress. Maintaining adequate capital buffers ensures financial stability and protects public deposits against unexpected credit and operational shocks. The Reserve Bank of India sets higher capital adequacy thresholds than international minimums.