Bank Capital Components

Bank capital components are the equity and eligible instruments that prudential rules recognize as available to absorb losses. The current Basel structure consists of Common Equity Tier 1, Additional Tier 1, and Tier 2 after required regulatory adjustments.

Capital Hierarchy

Retained Earnings, historically called undivided profits in some banking contexts, are an important CET1 component. The accounting balance still must pass through the regulatory capital adjustments.

What Makes Capital Eligible

Eligibility depends on more than an instrument’s label. Review:

• permanence or maturity
• subordination to depositors and senior creditors
• discretion over distributions
• redemption and call provisions
• required loss-absorption or conversion terms
• regulatory deductions, limits, and amortization
• supervisory approval and current national implementation

Common Mistakes

• Calling the current Basel categories “Tier 1, Tier 2, and Tier 3.” Tier 3 is not part of the current definition.
• Treating CET1, AT1, and Tier 2 as equally able to absorb losses while a bank operates.
• Assuming all accounting equity qualifies as regulatory capital.
• Comparing nominal instrument balances without checking terms, phase-outs, or regulatory adjustments.

Use Regulatory Capital for the complete hierarchy and calculation.

Source Check

The authoritative international starting points are Basel Framework CAP10 for eligible capital and CAP30 for regulatory adjustments. National rules determine the enforceable treatment.

Educational Use

This section provides general financial education, not investment, banking, accounting, legal, or regulatory advice.

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