Definition of Capital
For the purpose of calculating regulatory capital requirement, banks are required to classify their capital into three tiers as follows;
1. Tier 1 Capital
Tier 1 capital also called core capital shall comprise of highest quality capital elements and will include;
i. Fully paid up capital / capital deposited with SBP
ii. Balance in share premium account
iii. Reserve for Issue of Bonus Shares
iv. General Reserves as disclosed on the balance-sheet
v. Un-appropriated / un-remitted profits (net of accumulated losses, if any)
2. Tier 2 Capital
The Tier 2 capital shall include;
i. General Provisions or General Reserves for loan losses
ii. Revaluation Reserves
iii. Exchange translation Reserves
iv. Undisclosed Reserves
v. Subordinated debt.
3. Tier 3 Capital
The Tier 3 capital consisting of short-term subordinated debt would be solely for the purpose of meeting a proportion of the capital requirements for market risk.
