The correct answer is C. 1 and 3 only.
Tier I capital is the core capital of a bank. It is the highest quality capital and is used to absorb losses in the event of a default. Tier I capital consists of the following elements:
- Authorized Capital (Ordinary shares), statutory reserves, all other free reserves (disclosed), if any.
- Perpetual Non-Cumulative Preference Shares (PNCPS).
Paid-up capital (Preference shares) is not included in Tier I capital because it is not considered to be a permanent source of capital. Innovative Perpetual Debt Instruments (IPDI) are also not included in Tier I capital because they are not considered to be equity.
Here is a brief explanation of each option:
- Option 1: Authorized Capital (Ordinary shares), statutory reserves, all other free reserves (disclosed), if any.
Authorized capital is the maximum amount of
capital that a company is authorized to issue. Statutory reserves are reserves that are required by law to be held by a company. Free reserves are reserves that are not required by law to be held by a company.- Option 2: Paid-up capital (Preference shares).
Paid-up capital is the amount of capital that has been subscribed and paid for by shareholders. Preference shares are a type of share
that gives shareholders a preference over ordinary shareholders in the event of a liquidation.- Option 3: Perpetual Non-Cumulative Preference Shares (PNCPS).
PNCPS are a type of preference share that does not have a fixed maturity date. They also do not pay dividends on a regular basis.
- Option 4: Innovative Perpetual Debt Instruments (IPDI).
IPDI are a type of debt instrument that is designed to meet the capital requirements of banks. They are perpetual, meaning that they do not have a maturity date. They also do not pay interest on a regular basis.