Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It consists of the types of financial capital considered the most reliable and liquid, primarily Shareholders' equity. Examples of Tier 1 capital are common stock, preferred stock that is irredeemable and non-cumulative, and retained earnings.

Capital in this sense is related to, but different from, the accounting concept of shareholder's equity. Both tier 1 and tier 2 capital were first defined in the Basel I capital accord. The new, Basel II, accord has not changed the definitions in any substantial way.

Each country's banking regulator, however, has some discretion over how differing financial instruments may count in a capital calculation. This is appropriate, as the legal framework changes in different legal systems.

The theoretical reason for holding capital is that it should provide protection against unexpected losses. Note that this is not the same as expected losses - provisions, reserves and current year profits are for expected losses.

See also

• Tier 2 capital
• Capital requirements
• Basel Accord
• Basel Capital Accords
• Basel I
• Basel II

External link

• 10 largest banking groups by tier 1 capital at the end of 2004 - from The Economist.

Banking