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What Is the Di erence between Tier 1 Capital and

Tier 2 Capital?
By Steven Nickolas | Updated November 17, 2017 8:00 AM EST SHARE

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A:
Under the Basel Accord, a bank's capital consists of tier 1 capital and tier 2 capital, and the two
types of capital are di erent. Tier 1 capital is a bank's core capital, whereas tier 2 capital is a
bank's supplementary capital. A bank's total capital is calculated by adding its tier 1 and tier 2
capital together. Regulators use the capital ratio to determine and rank a bank's capital adequacy.

Tier 1 Capital
Tier 1 capital consists of shareholders' equity and retained earnings. Tier 1 capital is intended to
measure a bank's financial health and is used when a bank must absorb losses without ceasing
business operations. Under Basel III, the minimum tier 1 capital ratio is 10.5%, which is calculated by
dividing the bank's tier 1 capital by its total risk-based assets.

For example for the quarterly period ended September 30, 2017, Wells Fargo & Company (WFC) had NEW

tier 1 capital of $176.263 billion andTopics


risk-weighted assets worth
Reference $1.243 trillion.
Advisors So, the bank's
Markets tier 1 Academy
Simulator Search News, Symbols, Terms

capital ratio for the period was $176.263 billion / $1.243 trillion = 14.18%, which met the minimum
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Basel III requirement of 10.5%.
Tier 2 Capital
Tier 2 capital includes revaluation reserves, hybrid capital instruments and subordinated term debt,
general loan-loss reserves, and undisclosed reserves. Tier 2 capital is supplementary capital because
it is less reliable than tier 1 capital. In 2017, under Basel III, the minimum total capital ratio is 12.5%,
which indicates the minimum tier 2 capital ratio is 2%, as opposed to 10.5% for the tier 1 capital
ratio.

Wells Fargo & Company reported tier 2 capital of $32.526 billion. Its tier 2 capital ratio for the quarter
was $32.526 billion / $1.243 trillion = 2.62%. Thus, Wells Fargo's total capital ratio was 16.80%
(14.18% + 2.62%). Under Basel III, Wells Fargo met the minimum total capital ratio of 12.5%.

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Tier 3 Capital Tier 2 Capital
Tertiary capital held by banks to meet part of One of two categories by which a bank's capital
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The relationship between a banking A measurement of a bank's core equity capital
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