Distinguish between Tier 1 and Tier 2 Capital.

Tier 1 capital is the primary funding source of the bank and consists of shareholders' equity and retained earnings, capital reserves (surplus from sale of assets), eligible innovative perpetual debt instruments up to 15% of Tier 1 capital and perpetual non-cumulative preference shares. Tier 1 capital is the most reliable measure of a bank's financial strength and is crucial for maintaining confidence. Whereas, Tier 2 capital includes revaluation reserves, hybrid capital instruments, subordinated term debt, general loan-loss reserves, and undisclosed reserves. Tier 2 capital is considered less stable and less permanent than Tier 1 capital and therefore is subject to regulatory limits.