Economics • Banking & FinanceHard
Under the Basel III capital adequacy framework implemented in India, what constitutes Tier 1 Capital for commercial banks?
A. Subordinated debt instruments with a fixed maturity date and general loan-loss provisions
B. Common Equity Tier 1 capital and qualifying Additional Tier 1 instruments capable of absorbing losses on a going-concern basis✓ Correct Answer
C. Unsecured bank loans extended to retail borrowers with collateral security
D. Short-term commercial paper holdings and interbank deposits maturing within ninety days
💡 Solution & Explanation
Basel III Tier 1 capital comprises Common Equity Tier 1 capital, which includes common shares and retained earnings, alongside qualifying Additional Tier 1 instruments such as perpetual bonds that absorb losses when a bank faces financial distress while remaining in business. Subordinated debt instruments generally form part of Tier 2 capital rather than Tier 1. These stringent capital standards were introduced globally to strengthen bank resilience following the 2008 financial crisis. Capital conservation buffers are maintained over and above these baseline requirements.
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