DEFINITION of Undisclosed Reserves
Undisclosed reserves include the unpublished or hidden reserves of a financial institution that may not appear on publicly available documents such as a balance sheet but are nonetheless real assets, which are accepted as such by most banking institutions.
BREAKING DOWN Undisclosed Reserves
Undisclosed Reserves are generally described as such only in the banking industry as it applies to capital requirements and is designated as Tier 2 capital along with revaluation reserves and general provisions. Tier 1 or, core, capital is mainly composed of stockholders' equity in the company.
Tier 2 capital, or supplementary capital, includes a number of important and legitimate constituents of a bank's capital requirement. These forms of banking capital were largely standardized in the Basel I accord, issued by the Basel Committee on Banking Supervision and left untouched by the Basel II accord. National regulators of most countries around the world have implemented these standards in local legislation. In the calculation of regulatory capital, Tier 2 is limited to 100% of Tier 1 capital.
In practice, undisclosed reserves are not common but are accepted by some regulators where a bank has made a profit, but the profit has not appeared in normal retained profits or in general reserves of the bank. It is fairly standard for undisclosed reserves first to be accepted by a bank's supervisory authorities. Many countries do not accept undisclosed reserves as an accounting concept or as a legitimate form of capital.
Preferred or accepted forms of capital and collateral have grown in importance, particularly after the banking crisis during 2008 and 2009. Bank stress-tests conducted in response to numerous taxpayer-funded bailout programs highlighted how certain assets and reserves were woefully inadequate during the volatile markets during the Great Recession.