what is tier 2 capital 
the term tier 2 capital refers to one of the components of a bank s required reserves tier 2 is designated as the second or supplementary layer of a bank s capital and is composed of items such as revaluation reserves hybrid instruments and subordinated term debt it is considered less secure than tier 1 capital the other form of a bank s capital because it s more difficult to liquidate in the united states the overall capital requirement is partially based on the weighted risk of a bank s assets understanding tier 2 capitalbank capital requirements were designated as part of the international basel accords this set of recommendations was developed by the basel committee on bank supervision over a number of years dating back to the 1980s according to the regulations banks must maintain a certain amount of cash and or other forms of liquid assets on hand in order to meet their obligations no more than 25 of a bank s capital requirements can be comprised of tier 2 capital 1bank capital is divided into two layers tier 1 or core capital and tier 2 or supplementary capital a bank s capital ratio is calculated by dividing its capital by its total risk based assets the minimum capital ratio reserve requirement for a bank is set at 8 6 of which must be provided by tier 1 capital the remaining must be tier 2 capital along with tier 1 capital it provides a bank with a financial cushion in case it needs to liquidate its assets 21there are four components of tier 2 capital these include tier 2 capital is split into upper and lower levels upper level tier 2 capital consists of securities that are perpetual meaning they have no maturity date revaluation reserves and fixed asset investments lower level tier 2 capital consists of subordinated debt and is generally inexpensive for a bank to issue 6special considerationsundisclosed reserves may be counted as part of a bank s tier 2 capital in certain countries these reserves are profits a bank earns that don t appear on publicly available documents such as a bank s balance sheet despite not being disclosed most banks still consider these reserves to be real assets regulatory authorities in some countries recognize their banks undisclosed reserves as part of tier 2 capital most countries including the united states do not allow this kind of capital to be used to legitimately meet reserve requirements 78most countries including the united states do not allow undisclosed reserves to be used to meet reserve requirements 7 tier 2 capital vs tier 1 capitalas mentioned above a bank s capital reserves are divided into tiers unlike tier 2 capital tier 1 capital is a bank s core capital or the primary source of funding for a bank as such it consists of almost all of an institution s funds including all of its disclosed reserves and any equity capital like common stock this capital helps a bank absorb any losses so it can continue its day to day operations because this level is composed of a bank s core capital tier 1 is a very good indicator of its financial health this tier is considered more reliable than tier 2 capital that s because the capital is much easier to calculate accurately the assets that fall into this category are also much easier to liquidate 9