Surplus reserve is a type of reserve (specifically, a component of tier-1 capital (core capital, or tranche-1)) that a bank sets aside and holds out of its net earnings in each and every year as a security against unexpected losses and contingencies. It can also be used to offset accumulated losses or capitalized as paid-up capital with the approval of shareholders.
Surplus reserve consists of statutory surplus reserve and discretionary surplus reserve.
- Statutory surplus reserve: this reserve can be used to offset previous years’ losses, if any, or to expand the a bank’s operations, and may be converted into share capital by the issuance of new shares to existing shareholders in proportion to their existing shareholdings or by increasing the par value of the shares currently held by them, subject to a specific balance (percentage) after such issue relative to the registered capital (balance is not less than 25%).
- Discretionary surplus reserve: a surplus reserve that a bank, by its own decision, sets aside and holds out of its net earnings in each and every year as a security against unexpected losses and contingencies. The board of director (BOD) can decide to form such a reserve, determining its amount and uses. In certain situations, decision to create a discretionary surplus reserve has to be submitted to a shareholders’ meeting for ratification. Discretionary surplus reserve can be used to make up the losses of a previous year or any accumulated losses. It may also be used to increase the share capital.
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