A type of surplus reserve (in turn, a component of tier-1 capital (core capital, or tranche-1)) 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.

For example, a bank may transfer 15% of net profit (earnings) for a respective year to this reserve. Such transfer is subject to consideration and approval by shareholders’ general meeting.

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.