Multiple choice

A bank has revaluation reserves of Rs. 300 cr. What amount can be included in the Tier 2 capital?

  1. Rs. 300 cr

  2. Rs. 165 cr

  3. Rs. 135 cr

  4. Rs. 30 cr
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Correct Answer: Rs. 135 cr A revaluation reserve is a reserve created when a company has an asset revalued and an increase in value is brought to account. A simple example may be where a bank owns the land and building of its head-offices and bought them for $100 a century ago. A current revaluation is very likely to show a large increase in value. The increase would be added to a revaluation reserve. The reserve may arise out of a formal revaluation carried through to the bank's balance sheet, or a notional addition due to holding securities in the balance sheet valued at historic cost. Basel II also requires that the difference between the historic cost and the actual value be discounted by 55% when using these reserves to calculate Tier 2 capital. Hence, 45% of 300 cr = 135 cr. 

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