Basel I (1988) defined Tier 1 capital as the core capital to absorb losses, primarily comprising common stock (equity) and disclosed reserves (retained earnings). Option A is correct. Subordinated debt (B) is Tier 2 capital, undisclosed reserves (C) were allowed in Tier 2 under certain conditions but not Tier 1, and short-term capital (D) isn’t a Basel I category. Tier 1’s focus on equity ensures loss absorption capacity, a principle retained in later frameworks.
Exact Extract from Official Source:
BCBS, "International Convergence of Capital Measurement and Capital Standards" (Basel I), July 1988, para. 14: "Tier 1 capital consists predominantly of common stock and disclosed reserves (retained earnings), representing the highest quality capital available to cover losses."
GARP FRR Study Notes, Regulatory Framework Section: "Under Basel I, Tier 1 capital is limited to common equity and disclosed reserves, excluding subordinated debt and undisclosed reserves, which fall under Tier 2."
Chosen Answer:
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