What is Tier I Capital?

The concept of Tier 1 capital was established by the Basel Committee on Banking Supervision in its 1988 report on The International Convergence of Capital Measurement and Capital Standards. This report presented the outcome of the work done to secure convergence of supervisory regulations governing the capital adequacy of international banks with a view to strengthening the soundness and stability of the international banking system. A second objective was that the framework should be fair and have a high degree of consistency in its application to banks in different countries with a view to diminishing an existing source of competitive inequality between international banks. The committee concluded that the key element of capital is equity capital and disclosed reserves. This was the only element common to all countries banking systems and was wholly visible in published accounts. It further concluded that capital, for supervisory purposes, should be defined in two tiers in a way which required at least 50% of a bank's capital base should be a core element comprised of equity capital and published reserves from post-tax retained capital (Tier 1). Other elements of capital were admitted into Tier 2 up to an amount equal to the core capital. The elements of capital are as follows:


Tier 1 capital can include:

  • common stock;
  • non-cumulative preference stock;
  • share premium reserve;
  • disclosed reserves including retained earnings;
  • minority interests;
  • fund for general banking risks ( if stated as a separate item).

Tier 2 capital:

  • cumulative preference stock;
  • revaluation reserves (made up of either asset revaluation or unrealised gains/losses on securities) ;
  • subordinated debt;
  • undisclosed or hidden reserves;
  • any hybrid (debt/equity) capital instruments.

Any goodwill on the assets side of the balance sheet should be a deduction from Tier 1 capital.

Why do the asset figures quoted in The Banker rankings sometimes differ from the published accounts ?

Accounting standards in different countries sometimes allow the inclusion of contra items, such as customer liabilities for guarantees or acceptances, money held in trust and life insurance assets attributable to the policy holders, in the total assets figures. These are eliminated in our analyses.

Why do you use pre-tax profit?

The Banker chose to use pre-tax profit figures in its analyses because differing tax regimes from country to country makes the net profit an unreliable measure for comparing banks on a global scale.