Tier 1 capital

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Tier 1 capital is a measure of the strength of a banking institution in terms of its "capital adequacy," or its ability to meet claims on its assets in adverse market conditions. Tier 1 capital was first defined by the Basel Committee on Banking Supervision in the first Basel Accord of 1988 [1]as a standardized means of assessing market risk across jurisdictions. Tier 1 capital includes:

Tier 1 Capital includes:  

  • Common stock, undivided profits, paid-in-surplus; 
  • Non-cumulative perpetual preferred stock;  
  • Minority interests in consolidated subsidiaries;  

Minus  

  • All intangible assets (with limited exceptions);  
  • Identified losses;  
  • Deferred tax assets. [2]

Under Basel III, the third iteration of the accord, introduced in December 2010 and expected to be phased in beginning in January 2013, the tier 1 capital ratio would move from four percent of assets to six percent. [3]


References

  1. Instruments eligible for inclusion in Tier 1 capital. Bank for International Settlements.
  2. Key Financial Ratios. FDIC.
  3. Basel III Summary – Guide to the changes. Basel II Risk.