According to Basel II what constitutes Tier 1 capital?

According to Basel II what constitutes Tier 1 capital?
A . Equity capital and core capital
B . Profits to reserves and innovative Tier 1 capital
C . Equity capital and accrued profits to reserves
D . Core capital and innovative Tier 1 capital.

View Answer

Answer: C

Explanation:

Under Basel II, Tier 1 capital, also known as core capital, includes:

Equity Capital: This includes common stock and retained earnings. It is the highest quality of capital because it is fully available to cover losses.

Accrued Profits to Reserves: Profits that are retained and not distributed as dividends are added to reserves, increasing the bank’s capital base.

This combination of equity capital and retained earnings ensures that Tier 1 capital is robust and able to absorb significant losses, thereby providing a strong financial cushion.References: How Finance Works, sections on regulatory capital requirements and the components of Tier 1 capital??.