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Glossary

Tier 2 Capital Bonds

Category — Bond Types
Tier 2 Capital Bonds are bonds that are an integral part of the 2nd layer of banking capital. Tier 2 Capital Bonds, as a rule, are subordinated debt.

In the context of banking institutions, the capital of the first layer of the bank consists of deposits, and the capital of the 2nd layer includes hybrid tools, subordinated debt, and general reserves for covering losses on loans and others. Tier 2 Capital is optional, as it is less reliable than Tier 1 Capital. It is more difficult to assess accurately because of its composition of assets. Tier 2 Capital consists of 2 subcategories:

- Top-level capital: It consists of investments in fixed assets, rewarding reserves, and indefinite securities.
- Lower level capital: It consists of subordinated debt with a maturity of at least five years.

Although Tier 2 Capital Bonds usually have higher interest rates than other bonds, they also carry significantly higher risks. The banks are subject to legislative restrictions on the release of Tier 2 Bonds.

United Overseas Bank, 2% 14oct2031, USD, USD can serve as an example of the Tier 2 Capital Bonds. Its placement purpose is fixed as “Bail-in Basel III Tier 2 Capital.”
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