Tier 2 Capital

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DEFINITION of 'Tier 2 Capital'

One of two categories by which a bank's capital is divided. Tier 2 capital is supplementary bank capital that includes items such as revaluation reserves, undisclosed reserves, hybrid instruments and subordinated term debt. A bank's reserve requirements include its Tier 2 capital in its calculation, but it is considered less reliable than its Tier 1 capital. In the United States, the capital requirement for banks is, in part, based on the weighted risk associated with the bank's assets.

BREAKING DOWN 'Tier 2 Capital'

Components of Tier 2 Capital can be split into two levels: upper and lower. Upper Tier 2 maintains characteristics of being perpetual, senior to preferred capital and equity; having deferrable and cumulative coupons; and its interest and principal can be written down. Lower Tier 2 is relatively cheap for banks to issue; has coupons not deferrable without triggering default; and has subordinated debt with a maturity of a minimum of 10 years.

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