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Tier 1 Capital - What is it?

Dear All,

Once again i'd like to throw myself open to the combined brain power available through Accounting Web.

Could somebody explain to me the significance of Tier 1 capital within the assets of say an insurance company?

I am also interested to know to what extent this capital is protected if provided by an outside investor.

Again there is a real reason for asking this question but it is connected with a financial product which cant be named because it would constitute advertising on my part.

Thanks to anyone who can enlighten me. 



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15th Apr 2011 11:41

try google!
wikipedia says "Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It is composed of core capital,[1] which consists primarily of common stock and disclosed reserves (or retained earnings),[2] but may also include non-redeemable non-cumulative preferred stock.

Capital in this sense is related to, but different from, the accounting concept of shareholders' equity. Both Tier 1 and Tier 2 capital were first defined in the Basel I capital accord and remained substantially the same in the replacement Basel II accord. Tier 2 capital is senior to Tier 1, but subordinate to deposits and the deposit insurer's claims. These include preferred stock with fixed maturities and long-term debt with minimum maturities of over five years.

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 varies 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, which are covered by provisions, reserves and current year profits. In Basel I agreement, Tier 1 capital is a minimum of 4% ownership equity but investors generally require a ratio of 10%."

So in terms of your questions, it is not assets, it is capital, and it is protected based on the requirements of the regulator.

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