Title[ Part 2: The First Pillar - Minimum Capital Requirements
Section[ A. Regulatory capital
41. The definition of eligible regulatory capital, as outlined in the 1988 Accord11 and clarified in the 27 October 1998 press release on “Instruments eligible for inclusion in Tier 1 capital”, remains in place except for the modifications in paragraphs 37 to 39 and 43.
42. Under the standardised approach to credit risk, general provisions, as explained in paragraphs 381 to 383, can be included in Tier 2 capital subject to the limit of 1.25% of risk- weighted assets.
43. Under the internal ratings-based (IRB) approach, the treatment of the 1988 Accord to include general provisions (or general loan-loss reserves) in Tier 2 capital is withdrawn. Banks using the IRB approach for securitisation exposures or the PD/LGD approach for equity exposures must first deduct the EL amounts subject to the corresponding conditions in paragraphs 563 and 386, respectively. Banks using the IRB approach for other asset classes must compare (i) the amount of total eligible provisions, as defined in paragraph 380, with (ii) the total expected losses amount as calculated within the IRB approach and defined in paragraph 375. Where the total expected loss amount exceeds total eligible provisions, banks must deduct the difference. Deduction must be on the basis of 50% from Tier 1 and
50% from Tier 2. Where the total expected loss amount is less than total eligible provisions, as explained in paragraphs 380 to 383, banks may recognise the difference in Tier 2 capital up to a maximum of 0.6% of credit risk-weighted assets. At national discretion, a limit lower than 0.6% may be applied.
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