economics medium True/False

Under Basel III norms, Tier 2 Capital includes instruments like subordinated debt and hybrid capital, which are considered less secure than Tier 1 capital and primarily serve to absorb losses in the event of a bank's liquidation.

  1. True
  2. False

Answer: True

Tier 2 capital is supplementary capital. In the event of a bank failure, Tier 1 capital absorbs losses first to keep the bank running (going-concern). If the bank is inevitably winding down (gone-concern), Tier 2 instruments are then written down or converted to equity to protect depositors and senior creditors from taking total losses.

Topic Banking - Regulation
Exam Relevance Banking, UPSC Prelims, SSC
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