Skip to main content

TIER ONE CAPITAL

Today, we but pause for a bit to discuss something a little different from our usual real estate and allied topics - TIER ONE CAPITAL.

My good friend of about 10 years called my cell this morning to pick my brains on the basic difference between Tier One and Tier Two Capital owing to the fact that he knows that I wear another hat with roots in the Financial Services Industry. Within 3 minutes of talk he understood clearly what they are but I’m moved to sharing our conversation with our teeming bloggers (you never who’s going to learn something new). Here we go -

TIER ONE CAPITAL
This is one of the two categories into which a bank's capital is divided, consisting of the most central and important types of capital. According to banking rules, banks must keep a certain amount of tier one capital to protect them against failing. Tier one capital is the best form of bank capital - the money that the bank has in its coffers to support all the risks it takes: lending, trading and so on.

Under capital adequacy regulations meant to ensure banks keep enough money on hand, tier one capital is core capital that is relatively transparent and secure (comprising equity capital and disclosed reserves), while tier two capital is supplementary capital that is more complex and variable (such as loan loss provisions and subordinated debt).

Example
In recent years, tier one rules have been loosened to allow in less top-notch capital, such as hybrid debt. Hybrid - a halfway house between debt and equity - was issued in massive amounts, particularly by European banks, in recent years as a means to gear up in size without damaging credit ratings, or diluting shareholders.


Of course, such a dreamy instrument turned into a nightmare when the financial crisis hit, with hybrids unable to absorb losses, as at Northern Rock, the failed British lender. Regulators now want to do away with hybrids, restricting tier one capital largely to equity and retained profits, both of which can be eaten into in an emergency.

 Ken Egedi

Comments

Post a Comment

Popular posts from this blog

SURVEY OF PRICES OF PROPERTIES ON THE ISLAND

Sales price Rental per annum Lekki Phase 1  3 Bedroom flat N45m – N50m N2.5m – N3m 4 Bedroom wing of duplex  N70m – N80m   N3m – N4m Agungi 4 Bedroom detached house N45m – N50m N2.5m 3 Bedroom flat N40m      N1.5m – N1.8m Chevy view 4 Bedroom terrace house N42m N2.5m 3 Bedroom flats  N35m        N1.6m Crown Estate 4 Bedroom detached house  N30m – N40m  N1.5m – N2m Thomas Estate, Ajah 3 Bedroom flat N25m   N750k – N800k Abraham Adesanya 3 Bedroom bungalow  N12m – N14m N700k – N1m 2 Bedroom bungalow N11m – N12m  ...
2 comments
Read more

Quick fixes for quick profits in real estate

It has been said several times that ‘ideas rule the world’ and this holds true in real estate investing as well. We want to examine a time-tested idea that guarantees quick turnaround time and good returns on investment in most real estate markets. We’ll be examining guidelines for making a good return in rehabilitating and selling properties. First, you need to find a property that is in need of repairs or renovation but is located in a good area. 
Post a Comment
Read more

Nigeria Central Bank’s decision on CRR to have ‘shock effect’ on money market – Rewane

The MPC increased the already controversial Cash Reserve Ratio on public sector deposits from 50 to 75 per cent The decision by Nigeria’s Monetary Policy Committee, MPC, to increase the already controversial Cash Reserve Ratio, CRR, on public sector deposits from 50 to 75 per cent would in the short term, have a shocking effect on the nation’s money markets, Bismarck Rewane, a finance analyst and Managing Director, Financial Derivatives Company, has said. “The impact of this decision on money markets will be a shock effect in the short run and a re-turn to equilibrium rates within six weeks”, Mr Rewane said in a report analysing the MPC’s decision. He said the first time the MPC increased the CRR (the percentage of funds banks have to keep with the Central Bank) on public sector deposits in August 2013, an estimate of N1trn or 6.84 per cent of Money Supply (M2) was debited. “At that time, the impact was a spike in interbank rates of approximately 800 basis points (bps...
Post a Comment
Read more