A simple example is the situation where a bank owns the land and building of its head-offices and bought the properties for $100 a century ago.
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.
The provision qualifies for inclusion in Tier 2 capital as long it is not created against a known deterioration in value.
Provided these are close to equity in nature, in that they are able to take losses on the face value without triggering a liquidation of the bank, they may be counted as capital.
Only those with a minimum original term to maturity of five years can be included in the calculation of this form of capital; they must be subject to proper amortization arrangements.