Tier 2 capitalTier 2 capital

Tier 2 capital

23. Tier 2 capital includes other components of capital that, to varying degrees, fall short of the quality of Tier 1 capital stated in paragraph 17 but nonetheless contribute to the overall strength of an entity as a going concern. It is divided into:

(a) Upper Tier 2 capital – comprising components of capital that are essentially permanent in nature, including some forms of hybrid capital instrument; and

(b) Lower Tier 2 capital – comprising components of capital that are not permanent i.e. dated or limited life instruments.

Upper Tier 2 capital

24. Upper Tier 2 capital consists of the following components that satisfy the relevant criteria set out in Attachment B and Attachment C:

(a) perpetual cumulative preference shares;

(b) perpetual cumulative mandatory convertible notes;

(c) perpetual cumulative subordinated debt;

(d) any capital amounts otherwise meeting APRA’s requirements for Tier 1 capital instruments (refer to Attachment A) that are ineligible for inclusion as Tier 1 capital as a result of the limits in this Prudential Standard;

(e) any other hybrid capital instruments of a permanent nature approved, in writing, by APRA;

(f) shares issued from 1 January 1992 by way of a fully paid bonus issue arising from capitalisation of property revaluation reserves;

(g) a General Reserve for Credit Losses (refer to Prudential Standard APS 220 Credit Quality (APS 220) and also Attachment B of this Prudential Standard), unless APRA determines otherwise in writing. The amount of this reserve able to be included as Upper Tier 2 capital is subject to the following limits:

(i) for an ADI using the standardised approach to credit risk (refer to Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk): a maximum of 1.25 per cent of total risk-weighted on-balance sheet and off-balance sheet assets;

(ii) for an ADI using the internal ratings-based (IRB) approach to credit risk (refer to Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk): a maximum of 0.6 per cent of total credit risk-weighted assets for non-defaulted exposures, to the extent that total eligible provisions exceed total expected losses;

(iii) for an ADI using a partial IRB approach to credit risk: the sum of reserves proportionately based on the limits in paragraphs (i) and (ii); or

(iv) where it is not possible for the ADI to determine whether the General Reserves for Credit Losses relate to assets under the standardised approach to credit risk or the IRB approach to credit risk: allocation on a basis that is reasonable and consistent;