Definition
Tier 2 Capital
Tier 2 capital is a bank's supplementary, gone-concern capital, including subordinated debt and certain reserves, that absorbs losses only if the bank is wound up.
Tier 2 ranks below Tier 1 in quality because it protects depositors mainly in liquidation rather than while the bank is a going concern. It typically includes subordinated bonds with a minimum maturity, general provisions and revaluation reserves, subject to Basel limits.
Indian banks issue Tier 2 bonds to top up their total CRAR without diluting equity. Because Tier 2 cannot exceed Tier 1 under Basel norms, a bank that is short on core capital cannot fix its solvency simply by issuing more Tier 2 debt.
Related terms
- Capital Adequacy Ratio (CAR / CRAR)The Capital Adequacy Ratio, also called CRAR, is the ratio of a bank's capital to its risk-weighted assets, measuring its ability to absorb losses.
- Tier 1 CapitalTier 1 capital is a bank's core, going-concern capital, made up mainly of equity and reserves plus eligible additional Tier 1 instruments, that absorbs losses while the bank operates.
- Basel III NormsBasel III is the global bank regulation framework, adopted by the RBI, that strengthens capital quality, adds liquidity and leverage standards, and introduces capital buffers.
- Subordinated DebtSubordinated debt is borrowing that ranks below senior creditors and depositors in repayment, often issued by banks and NBFCs to raise Tier 2 capital.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.