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DMPQ: Define the following terms; a) Tier -1 capital b) Tier -2 capital c) CAR d) Public debt( Economy)

RAS/RTS Prelims and Mains Exam Preparation

Tier-1 capital:     Tier 1 capital, used to describe the capital adequacy of a bank, is core capital that includes equity capital and disclosed reserves. Tier 1 capital is essentially the most perfect form of a bank’s capital — the money the bank has stored to keep it functioning through all the risky transactions it performs, such as trading/investing and lending.

 

Tier-2 capital:        Tier-2 capital is the secondary component of bank capital, that makes up a bank’s required reserve. Tier 2 capital is a measure of a bank’s financial strength with regard to the second most reliable forms of financial capital, from a regulator’s point of view. It consists of accumulated after-tax surplus of retained earnings, revaluation reserves of fixed assets and long-term holdings of equity securities, general loan-loss reserves, hybrid (debt/equity) capital instruments, and subordinated debt.

 

 

CAR:     Capital adequacy ratio is the percentage of total capital(total of tier 1 and tier 2 capitals) to the total risk-weighted assets. It is a measure of banks capital. It helps to prevent bank failure.

 

Public debt:    Public debt includes internal debt comprising borrowings inside the country like market loans; borrowings from RBI   on the basis of special securities bills and external debt comprising loans from foreign countries, International financial institutions, NRI deposits.

 

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