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FRM Part II · FRM Exam Part II · Capital Structure in Banks

A bank's regulatory capital framework under Basel III distinguishes between going-concern and gone-concern capital. Which of the following instruments is classified as going-concern capital but is NOT Common Equity Tier 1 (CET1)?

Perpetual non-cumulative preferred shares that meet the criteria are Additional Tier 1 capital. They absorb losses on a going-concern basis but are not common equity. Subordinated term debt and eligible general provisions are Tier 2, and retained earnings are part of CET1.

  1. ASubordinated term debt with an original maturity of ten years
  2. BPerpetual non-cumulative preferred shares meeting Additional Tier 1 criteriaCorrect
  3. CGeneral loan loss provisions included up to the permitted limit
  4. DRetained earnings and disclosed reserves

Explanation

Going-concern capital comprises CET1 plus Additional Tier 1 (AT1). Perpetual non-cumulative preferred shares meeting AT1 criteria absorb losses while the bank continues operating but are not common equity. Subordinated term debt and eligible general provisions are Tier 2 (gone-concern), while retained earnings are CET1.

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