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Bankers go head to head over Tier 1 capital
whiteboard tier 1 capital
Tier 1 capital is represented in the equity section of a bank's balance sheet. The bank sells shares, cash comes in, and the equity account is more or less increased indefinitely.
But the cash can go out the door at any time. Why is there such a regulatory focus on Equity, which only represents past transactions, and not current assets like cash or investments?
I love the program and whiteboard. Any insight would be awesome.
Paddy,
I was with you until the end, when your hypothetical Tier 1 Capital included investments in foreign banks. From your explanation, I thought investments were the Tier 2 Capital, which were theoretically more controllable (I'm assuming from the standpoint that the bank is able to make those decisions without having to worry about depositor flight). When you said Tier 1 is thought to include shareholder equity, does that include cash reserves? Or is this excluding required cash reserves by regulators?
Thanks for shedding some light on this mysterious topic.
