What it is
Capital comes in grades. Tier 1 is the best: money shareholders put in, profits kept as reserves, and perpetual instruments. It is there for good and absorbs losses first.
Tier 2 is weaker: debentures that must be repaid, and the general provision on pass loans. It helps but is not permanent.
Tier 1 ÷ risk-weighted assets shows the permanent cushion. NRB's framework requires at least 6%, within the 11% total.
How it is calculated
Tier 1 ratio (%) = Tier 1 capital ÷ Total risk-weighted assets × 100. Tier 1 = CET1 + Additional Tier 1 (perpetual instruments).
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL's Tier 1 capital to RWA was 9.68% at the end of FY 2082/83 Q4, above NRB's 6% minimum, and most of its 12.37% total ratio.
What good looks like
A large share of the total ratio made up of Tier 1 is a stronger bank than one padded with debentures. Compare the gap between total and Tier 1 across banks.
Watch out
- Deductions (goodwill, deferred tax assets, investments in subsidiaries) reduce Tier 1 below plain equity.
- A debenture issue raises the total ratio but not Tier 1.
- A merger's goodwill can lower Tier 1 noticeably.
In Nepal
NRB Capital Adequacy Framework 2015: minimum Tier 1 6% of RWA. The 2.5% conservation buffer must be met with common equity, so in practice Tier 1 needs to be well above 6%. NRB's 2082 dividend procedure cites core capital tests (for example, 6.5% core and 11% total for non-national development banks and finance companies).
Questions
Because NRB deducts items like goodwill, deferred tax assets and some investments before counting equity as capital.
No. Ordinary subordinated debentures count only in Tier 2.