The objective of Tier 2 is to provide loss absorption on a gone-concern basis. Based on this objective, the following out the minimum set of criteria for an instrument to meet or exceed in order for it to be included in Tier 2 capital. (Annex 4)
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| | • | For details on the qualifying criteria for Tier 2 capital, please refer to annex # 4.
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Tier 2 capital consists of the sum of the following elements:
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| | • | Instruments issued by the bank that meet the criteria for inclusion in Tier 2 capital (and are not included in Tier 1 capital);
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| | • | Stock surplus (share premium) resulting from the issue of instruments included in Tier 2 capital;
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| | • | Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion in Tier 2 capital and are not included in Tier 1 capital are described in section 3.
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| | • | Certain loan loss provisions
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| | • | Regulatory adjustments applied in the calculation of Tier 2 Capital.
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The treatment of regulatory adjustments applied in the calculation of Tier 2 Capital are addressed in section 4.
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Stock surplus (share premium) resulting from the issue of instruments included in Tier 2 capital;
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Stock surplus (i.e. share premium) that is not eligible for inclusion in Tier 1, will only be permitted to be included in Tier 2 capital if the shares giving rise to the stock surplus are permitted to be included in Tier 2 capital.
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General provisions/general loan-loss reserves (for banks using the Standardized Approach for credit risk)
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Provisions or loan-loss reserves held against future, presently unidentified losses are freely available to meet losses which subsequently materialize and therefore qualify for inclusion within Tier 2. Provisions ascribed to identified deterioration of particular assets or known liabilities, whether individual or grouped, should be excluded. Furthermore, general provisions/general loan-loss reserves eligible for inclusion in Tier 2 will be limited to a maximum of 1.25 percentage points of credit risk-weighted risk assets calculated under the Standardized approach.
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Excess of total eligible provisions under the Internal Ratings-based Approach
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Where the total expected loss amount is less than total eligible provisions, as explained in paragraphs 380 to 383 of the June 2006 Comprehensive version of Basel II, banks may recognize the difference in Tier 2 capital up to a maximum of 0.6% of credit risk weighted assets calculated under the IRB approach. SAMA may apply a lower limit than 0.6% which will be communicated to banks.
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