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

Under Basel III, which feature is required for an instrument to qualify as Additional Tier 1 capital but is NOT required for Tier 2 capital?

Additional Tier 1 instruments must be perpetual with no maturity and no incentive to redeem, plus fully discretionary coupons. Tier 2 instruments may be dated, with a minimum original maturity of five years. Subordination, being paid in and being unsecured are common requirements for both categories.

  1. AIt must be subordinated to depositors and general creditors
  2. BIt must be perpetual with no maturity date or incentive to redeemCorrect
  3. CIt must be issued and paid in by the bank
  4. DIt must not be secured or covered by a guarantee of the issuer

Explanation

Additional Tier 1 instruments must be perpetual, with no step-ups or other redemption incentives, and have fully discretionary distributions. Tier 2 instruments have a minimum original maturity of five years. Subordination, being paid in, and being unsecured apply to both.

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