Core Tier 1

The positive performance of the Milan Stock Exchange yesterday was mainly influenced by the words uttered yesterday by the Governor of the Bank of Italy (and future, from November, Bce  President) on the health of Italian banks, and  because of these words  banks  equities made  big gains in price, so dragging  the entire list.
In particular, Draghi said that the  "core tier 1 ratio"  of the biggest italian banks is definitely above 5%., a reference limit.
The Tier 1  is the most  important component of the banks' capital and shows  the solidity of a bank. The banks' "core capital Tier 1"(we have Tier 2 and  Tier3 as well)  is made from retained earnings and reserves, and ordinary  and savings shares. If we also consider the bonds  we get  to  the total composition of Tier 1. These bonds are known as "subordinated" (their payments must be postponed , in the event of bankruptcy or liquidity problems of the issuer, at  the normal bonds). These kind of bonds are  also present in the composition of Tier 2 (Lower and Upper) and Tier3, although with different characteristics. That financial instruments  are reimbursed at  100 and already have fixed coupons  . Normally they do not expire (they are perpetual securities), but there is a call option (ie the possibility to repay the title) indicated on the prospectus, and which generally coincides with the 10 th year.
According to the parameters established by the Basel Accords,  the ratio of Tier 1 risk-weighted assets must be at least 4%.
Of course, the operations of a capital increase that many banks have made (the last Monte dei Paschi di Siena in these days) have recently contributed to the improvement of the coefficients.