D. Definition of capital elements
(i) Tier 1: includes only permanent shareholders' equity (issued and fully paid ordinary shares/common stock and perpetual non-cumulative preference shares) and disclosed reserves (created or increased by appropriations of retained earnings or other surplus, e.g. share premiums, retained profit, general reserves and legal reserves). Disclosed reserves also include general funds (such as fund for general banking risk in certain EC countries) of the same quality that meet the following criteria:
Allocations to the funds must be made out of post-tax retained earnings or out of pre-tax earnings adjusted for all potential tax liabilities;
The funds and movements into or out of them must be disclosed separately in the bank’s published accounts;
The funds must be available to a bank to meet losses for unrestricted and immediate use as soon as they occur;
Losses cannot be charged directly to the funds but must be taken through the profit and loss account.
In the case of consolidated accounts, this also includes minority interests in the equity of subsidiaries which are less than wholly owned. This basic definition of capital excludes revaluation reserves and cumulative preference shares.
Are you purely taking the FRM 'for exam sake' or to enrich your skillset in the long run?
The question has always to be 'YES'. An eager FRM candidate must strive for the best knowledge and not speculate on sth. what might show up on the exam.
Anthony Saunders 'Credit Risk Management In and Out of the Financial Crisis' writes:
'For the purposes of capital regulation under Basel I codes, the calculation of risk-adjusted asset values of Off-Balance-Sheet market contracts requires a two step approach: 1. credit equivalent amounts are calculated for each contract 2. and the credit equivalent amounts are multiplied by an approporiate risk weight.
The notional or face values of all non-exchange traded swap, forward and derivative contracts are first conversted into credit-equivalent amounts (as if they are on-balance sheet instruments)'