FRM Part I · FRM Exam Part I · Banks
Which of the following instruments qualifies as Common Equity Tier 1 capital under Basel III?
Retained earnings and common shares issued by the bank qualify as CET1, the highest-quality capital that absorbs losses on a going-concern basis. Perpetual preferred shares are Additional Tier 1, and subordinated debt and general provisions count only as Tier 2 capital.
- ASubordinated debt with an original maturity of ten years
- BPerpetual non-cumulative preferred shares
- CRetained earnings and common shares issued by the bankCorrect
- DGeneral loan loss reserves up to a limit
Explanation
CET1 consists of common shares, retained earnings and other disclosed reserves. Perpetual non-cumulative preferred shares are Additional Tier 1, while subordinated debt and limited general provisions are Tier 2.
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