Tier-one capital
Banks' capital can be split into tiers. Tier one represents capital of the highest quality.
One way regulators try and stop banks going bust is to impose capital requirements. Typically a bank has to ensure that capital it can count on as its own ('own funds') exceeds a proportion of its 'risk-weighted assets' in essence, the money it is owed adjusted for the risk that it won't be paid.
The banks' own capital can be split into tiers. Tier one represents capital of the highest quality. This includes funds raised by issuing shares plus past profits. So if a bank has issued $200m of shares and made profits of $100m, its tier one capital is $300m. If risk-weighted assets total $1,400m, it has a capital ratio of 21% (300/1,400). If that is below the regulator's target, the bank could be forced to raise fresh capital or sell assets.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Barclays warns of significant rise in social media investment scams
Investment scam victims are losing an average £14k, with 61% of those falling for one over social media. Here's how to spot one and keep your money safe
By Oojal Dhanjal Published
-
Over a thousand savings accounts now offer inflation-busting rates – how long will they stick around?
The rate of UK inflation slowed again in March, boosting the opportunity for savers to earn real returns on cash in the bank. But you will need to act fast to secure the best deals.
By Katie Williams Published