A key principle in bank supervision which regards capital as the cornerstone of a bank's strength. The Bank for International Settlements (BIS) devised a risk-weighted framework for bank capital adequacy which has been adopted in all OECD countries. Under these guidelines, banks must hold a minimum of 4 per cent of risk-weighted assets (ie, weighted for credit risk) as 'core' (Tier 1) capital and a ratio of total capital (Tiers 1 and 2) of no less than 8 per cent of risk-weighted assets. Tier 1 capital consists of paid-up ordinary shares, non-repayable sharepremium account, general reserves, retained earnings, non-cumulative irredeemable preference shares and minority interests in subsidiaries. Tier 2 or supplementary capital includes general provisions for doubtful debts (subject to a limit), assetrevaluation reserves, cumulative irredeemable preference shares, mandatory convertible notes and similar capital instruments, perpetual subordinated debt and redeemable preference shares and term subordinated debt (up to a limit). Tier 1 capital must always exceed Tier 2. The BIS is proposing to adjust the minimum capital requirement to capture market risk.
