Banking TierII CAPITAL

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CA Manish K Dhoot (Querist)
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11 April 2009 What is Undisclosed Reserve included in TierII capital? All reserves are disclosed then how can TierII capital is calculated?

Sachidanand Singh

Sachidanand Singh (Expert)
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13 April 2009 As per RBI’s Prudential Guidelines on Capital Guidelines and Market Discipline following are the elements of Tier 2 Capital:
1. Revaluation reserves arising from revaluation of assets that are undervalued on the bank’s books, typically bank premises. … consider revaluation reserves at a discount of 55 percent while determining their value for inclusion in Tier 2 capital. Such reserves will have to be reflected on the face of the Balance Sheet as revaluation reserves.
2. General provisions and loss reserves not attributable to the actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses…. (Investment fluctuation Reserve has been shifted to Tier 1)
3. Hybrid debt capital instruments which combine certain characteristics of equity and certain characteristics of debt. Examples are Perpetual Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative Preference Shares (RNCPS) and Redeemable Cumulative Preference Shares (RCPS)
4.Subordinated debt : for inclusion in Tier 2 capital instruments with an initial maturity of less than 5 years or with a remaining maturity of one year should not be considered.
I cannot say what is meant by undisclosed reserve.
To calculate Tier 2 Capital of a bank, you will have to check the aforesaid guidelines as there are many limits and sub limits and then should have access to detailed balance sheet of the bank.