Tier 1 capitalTier 1 capital

Tier 1 capital

17. Tier 1 capital comprises the highest quality components of capital that fully satisfy all of the following essential characteristics:

(a) provide a permanent and unrestricted commitment of funds;

(b) are freely available to absorb losses;

(c) do not impose any unavoidable servicing charge against earnings; and

(d) rank behind the claims of depositors and other creditors in the event of winding-up.

18. For the purposes of calculating an ADI’s capital base, Tier 1 capital is divided into:

(a) Fundamental Tier 1 capital, which is the highest form of capital, consists of:

(i) paid-up ordinary shares;[1]

(ii) general reserves (excluding any General Reserve for Credit Losses which is included in Upper Tier 2 capital);

(iii) retained earnings;

(iv) current year earnings;

(v) foreign currency translation reserve;

(vi) capital profits reserve (representing realised gains on the disposal of revalued assets that have not been transferred from asset revaluation reserves to retained earnings); and

(vii) minority interests arising from consolidation of Tier 1 capital of subsidiaries (only for Level 2 calculations); and

(b) Residual Tier 1 capital, which consists of all other components of capital qualifying for Tier 1 status, is divided into:

(i) Non-innovative Residual Tier 1 capital – comprising perpetual non-cumulative preference shares that satisfy the relevant criteria set out in Attachment A; and

(ii) Innovative Tier 1 capital – comprising all other Residual Tier 1 capital instruments that satisfy the relevant criteria set out in Attachment A and Attachment C.

19. General reserves are created after tax and include, but are not limited to:

(a) reserves from equity-settled share-based payments (share or share options) granted to employees as part of their remuneration package provided that:

(i) the share or share options granted relate only to the ordinary shares of the ADI itself; and

(ii) there are no circumstances in which such remuneration can be converted into another form (e.g. cash).

Any other reserves associated with share-based payments must be excluded from capital; and

(b) cumulative unrealised gains or losses on hedges[2] offsetting gains or losses included in Tier 1 capital (e.g. movements in the currency value of foreign-currency-denominated hedging instruments that offset movements in foreign-currency-denominated items recognised in the foreign currency translation reserve). This includes fair value gains or losses on derivatives representing effective economic hedges of assets.