Earlier today we wrote about Consolidated bank shoring its Tier II Capital. What is this though? A bank’s ability to lend depends on its capital availability and the credibility of the borrower. Shoring is the act of temporarily supporting a structure to protect it from damage. In this particular situation, shoring ensures that in case of bankruptcy, the bank is able to compensate its investors. This therefore means that Consolidated Bank will use Kes1 billion to back up its Tier II capital.
Tier II capital is a term used to describe a bank’s ability to secure itself based its financial strength and stability. Tier I is a bank’s primary capital base while Tier II refers to a bank’s secondary capital and includes undisclosed reserves, general loss reserves and subordinated term debt; it constitutes a maximum of 50% of a bank’s capital.
Undisclosed reserves are the unpublished or hidden assets of a financial institution. They may not appear on public documents like balance sheets and as such, most countries do not recognise them as a legitimate form of capital.
Revaluation reserves are assets that may have increased or decreased in value over a certain period of time. General loss reserves are reserves used to cover the operating expenses of a financial institution like a bank.
Subordinated term debt refers to loans that the bank deems as secondary to other loans. It is a debt that the bank owes but does not prioritise over other more important debts. If someone is a secondary debt holder, the bank will pay that person only after the primary debt holders have been compensated. If the person is a shareholder, securities issued as subordinated debt will pay interest and principal but only after all interest that is due and payable has been paid to all senior creditors in the case of bankruptcy or liquidation.
Banks often back up their corporate credits in order to maintain a business relationship with their customers. They have to be able to prove to their clients that investments are safe and secure. As such, shoring tier II capital is used as a buffer against credit losses that may be incurred on assets such as corporate loans and syndicated credits. It is an effective way to safeguard both the bank and the client. Making sure your money is safe.