The own funds of a financial institution are composed of two primary components: Tier 1 capital and Tier 2 capital. In regulatory terms, Tier 1 capital refers to the core capital, which includes the most reliable forms of financial resources, crucial for the institution's solvency and operational resilience.

Tier 2 capital, while subordinate, supplements Tier 1 capital and enhances the institution's ability to absorb losses. Understanding the distinction and interplay between these capital tiers is essential for compliance professionals tasked with ensuring adherence to regulatory capital requirements and maintaining overall financial stability.