Criteria for inclusion in Tier 2 Capital |
| 1. | Issued and paid-in |
| 2. | Subordinated to depositors and general creditors of the bank |
| 3. | Is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis depositors and general bank creditors |
| 4. | Maturity: |
| | a. | minimum original maturity of at least five years |
| | b. | recognition in regulatory capital in the remaining five years before maturity will be amortized on a straight-line basis |
| | c. | there are no step-ups or other incentives to redeem |
| 5. | May be callable at the initiative of the issuer only after a minimum of five years: |
| | a. | To exercise a call option a bank must receive prior supervisory approval; |
| | b. | A bank must not do anything that creates an expectation that the call will be exercised; (An option to call the instrument after five years but prior to the start of the amortization period will not be viewed as an incentive to redeem as long as the bank does not do anything that creates an expectation that the call will be exercised at this point.) and |
| | c. | Banks must not exercise a call unless: |
| | i. | They replace the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank; or |
| | ii. | The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised (minimum refers to the regulator’s prescribed minimum requirement, which may be higher than the Basel III Pillar 1 minimum requirement.) |
| 6. | The investor must have no rights to accelerate the repayment of future scheduled payments (coupon or principal), except in bankruptcy and liquidation. |
| 7. | The instrument cannot have a credit sensitive dividend feature, that is a dividend/coupon that is reset periodically based in whole or in part on the banking organization’s credit standing. |
| 8. | Neither the bank nor a related party over which the bank exercises control or significant influence can have purchased the instrument, nor can the bank directly or indirectly have funded the purchase of the instrument. |
| 9. | If the instrument is not issued out of an operating entity or the holding company in the consolidated group (e.g. a special purpose vehicle – “SPV”), proceeds must be immediately available without limitation to an operating entity (An operating entity is an entity set up to conduct business with clients with the intention of earning a profit in its own right) or the holding company in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in Tier 2 Capital. |