--- title: "Tier 2 Capital: definition, formula, and thresholds" description: "Tier 2 capital is the second-quality layer of regulatory capital: primarily subordinated debt, qualifying allowance for credit losses, and certain long-dated instruments that absorb losses only on liquidation rather than as a going concern." canonical_url: https://www.bankregreports.com/glossary/tier2-capital/ source: BankRegReports category: "Capital" units: "$" schedule: "Schedule RC-R Part I" --- # Tier 2 Capital > Tier 2 capital is the second-quality layer of regulatory capital: primarily subordinated debt, qualifying allowance for credit losses, and certain long-dated instruments that absorb losses only on liquidation rather than as a going concern. ## Formula ``` Total Capital = Tier 1 Capital + Tier 2 Capital ``` Tier 2 includes subordinated debt with at least 5-year original maturity, the portion of the Allowance for Credit Losses up to 1.25% of credit-risk-weighted assets, certain hybrid instruments, and limited revaluation reserves. Each instrument is haircut as it nears maturity. ## Why it matters Tier 2 is cheaper than equity but absorbs losses only in a wind-down scenario. Banks use Tier 2 to optimize total-capital ratios without diluting common shareholders. Issuance is concentrated at the largest banks because subordinated-debt investors require a developed secondary market. ## How to read it Most large banks run Tier 2 / Total Capital between 10% and 25%. A Tier 2 share near zero suggests a bank funds itself almost entirely with equity; a high Tier 2 share signals deliberate capital-stack optimization (typical of G-SIBs). ## Thresholds | Range | Reading | What it means | |---|---|---| | ≥ 25% | Heavy | Tier 2-reliant capital stack; sensitive to refinancing. | | 10–25% | Typical | Normal range for large banks. | | < 10% | Light | Largely equity-funded capital stack. | ## Worked example Bank of America reported Tier 1 capital of $211B and Total capital of $250B at year-end 2024, implying $39B of Tier 2 (mostly subordinated notes issued at the holding company and pushed down to the bank). Tier 2 represented about 16% of total capital. ## Questions ### Is Tier 2 capital safer than equity? No. For the bank's safety, equity (Tier 1) is more loss-absorbing. Tier 2 absorbs losses only in liquidation. For the investor, Tier 2 is safer than equity because it has a fixed coupon and is senior to equity in wind-down. ### Why is ACL included in Tier 2? Loan-loss reserves represent capital effectively held against expected credit losses. Including the portion below 1.25% of credit-RWA recognizes its loss-absorbing capacity while preventing reserve buildup from gaming the regulatory ratio. ### Can banks call Tier 2 subordinated debt early? Most issues have a call feature, but exercising it requires regulatory approval. Banks typically replace called Tier 2 with new issuance to preserve total capital. ## Sources - [12 CFR §217.20: Federal Reserve Tier 2 capital definition](https://www.ecfr.gov/current/title-12/part-217) - [FFIEC Call Report Schedule RC-R Part I](https://www.ffiec.gov/sites/default/files/data/reporting-forms/FFIEC031_FFIEC041_202606_i.pdf) (PDF) ## Related metrics - [Total Capital](https://www.bankregreports.com/glossary/total-capital/): Total capital is a bank's regulatory capital: tier 1 capital (common equity tier 1 plus additional tier 1) plus tier 2 capital. Banks report it on Call Report Schedule RC-R, Part I. It is not the same as total equity capital, the book net worth on Schedule RC. - [Tier 1 Capital](https://www.bankregreports.com/glossary/tier1-capital/): Tier 1 capital is a bank's core, going-concern capital: its highest-quality common equity plus additional tier 1 instruments such as perpetual preferred stock. It is the capital that absorbs losses while the bank keeps operating, and it is the numerator of the tier 1 risk-based and leverage ratios. - [Common Equity Tier 1 Capital Ratio](https://www.bankregreports.com/glossary/cet1-ratio/): The CET1 ratio is a bank's common equity tier 1 capital divided by its risk-weighted assets. It measures the bank's highest-quality capital (common stock and surplus, retained earnings and, for banks that have not opted out, accumulated other comprehensive income, less regulatory deductions) against its risk-weighted assets. It is the most-watched single capital indicator in US bank supervision after the 2013 Basel III reforms. - [Total Risk-Based Capital Ratio](https://www.bankregreports.com/glossary/total-rbc/): The total risk-based capital ratio is a bank's total regulatory capital (tier 1 plus tier 2) divided by its risk-weighted assets. US rules require at least 8%, 10% to be well capitalized, and 10.5% including the capital conservation buffer. - [Allowance for Credit Losses](https://www.bankregreports.com/glossary/allowance-credit-losses/): The allowance for credit losses (ACL), called the allowance for loan and lease losses (ALLL) before the CECL standard, is the reserve a bank holds against losses it expects on its loans. It is deducted from gross loans on the balance sheet, and under CECL it covers expected losses over each loan's whole life. ## About this document This is the markdown twin of the page named in `canonical_url` above. Source filings are public record; the cleaning, normalization, cross-source linkage, and derived metrics are BankRegReports' own. Attribute with a link to the canonical URL. Markdown twins are published for editorial content only. Institution data pages do not have them. For data at scale use the API, which is documented at https://www.bankregreports.com/api/ and specified at https://www.bankregreports.com/openapi.json. It returns typed JSON with explicit units and periods, and one call replaces hundreds of page fetches. ## Sitemap - [Glossary](https://www.bankregreports.com/glossary/): every metric, with formula and thresholds - [Blog](https://www.bankregreports.com/blog/): analysis and explainers - [API documentation](https://www.bankregreports.com/api/): the programmatic way to get this data - [XML sitemap](https://www.bankregreports.com/sitemap.xml): the complete crawlable index