INTM267763 - 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:

  1. 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’.

  1. 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 Prudential Regulation Authority (PRA) 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 PRA 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 PRA’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.