The attribution of capital to foreign banking permanent establishments in the UK: The approach in determining an adjustment to funding costs - STEP 3: Determining the equity capital: Tier 1 capital
Tier 1 capital takes two forms:
- Issued capital
The majority of the issued capital will be issued share capital. This can be allotted, called up and fully paid ordinary share capital, or perpetual non-cumulative preferred (or preference) shares which are not redeemable at the option of the holder. This issued capital will be ‘equity capital’.
- Internally generated capital.
The second form of capital falling within Tier 1 is internally generated capital. This can include:
- general and other reserves created by appropriations of retained earnings
- share premium and other surpluses
- retained profits and losses arising during the course of the current year
The Financial Services Authority (FSA) provides for certain items to be taken into account and/or deducted from these reserves or profits/losses in order to arrive at a figure of Tier 1 capital, but to the extent that the net result would qualify for Tier 1 for FSA capital adequacy directive requirements, then this internally generated capital will equate to ‘equity capital’ and not ’loan capital’ for the purposes of CTA09/Part 2/Chapter 4.
In certain circumstances a bank may also be able to issue ’innovative’ or ’hybrid’ Tier 1 capital. These are interest-bearing debt instruments. Such instruments can only be issued in specific circumstances and must have defined characteristics in order to qualify as Tier 1 capital for the FSA’s capital adequacy requirements. For the purposes of CTA09/Part 2/Chapter 4 this hybrid or innovative Tier 1 is loan capital and not equity capital. See also INTM267773.