Tier 1 debt is issued by banks and is counted by regulators as part of their tier 1 capital. It combines features of equity and debt and carries higher interest payments than other subordinated and senior debt.

Tier 2 debt is issued by banks and is more bond-like than tier 1 but still has some equity-like features. It ranks senior to tier 1 but is subordinated to senior bank debt.

The combination of equity-like (for example is perpetual with no fixed maturity date) and bond-like (for example pays interest rather than a dividend) features of tier 1 and some tier 2 debt mean these instruments are also called hybrid debt.