FRM Part I · FRM Exam Part I · Banks
Under the Basel framework, which of the following instruments would be classified as Common Equity Tier 1 (CET1) capital?
Retained earnings and common shares are CET1 capital, the highest quality loss-absorbing capital under Basel. Dated subordinated debt and general loan loss reserves are Tier 2, while perpetual non-cumulative preferred shares are generally Additional Tier 1.
- ASubordinated debt with an original maturity of ten years
- BRetained earnings and common shares issued by the bankCorrect
- CPerpetual non-cumulative preferred shares with a coupon
- DGeneral loan loss reserves up to a limit
Explanation
CET1 consists mainly of common shares and retained earnings (plus other comprehensive income and certain reserves). Subordinated dated debt and general provisions are Tier 2, and perpetual non-cumulative preferred shares are typically Additional Tier 1.
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