Tier 1 Capital [CET1]

Tier 1 capital represents a bank’s core capital, consisting of common equity and retained earnings (Common Equity Tier 1 or CET1) plus additional Tier 1 instruments like non-cumulative perpetual preferred stock. It’s the most loss-absorbing form of capital, protecting depositors and creditors. Under Basel III, banks must maintain minimum Tier 1 capital of 6% of risk-weighted assets, including 4.5% CET1. For example, a bank with $100 billion in risk-weighted assets needs at least $6 billion in Tier 1 capital. CET1 includes common stock, retained earnings, and other comprehensive income, minus regulatory deductions for intangibles and deferred tax assets. Additional Tier 1 includes instruments that are perpetual, non-cumulative, and convertible to common equity or written down during stress. Tier 1 leverage ratio (Tier 1 capital/total assets) must exceed 4% for most banks. Strong Tier 1 capital indicates ability to absorb losses without becoming insolvent. During stress tests, regulators assess whether Tier 1 ratios remain above minimums under adverse scenarios. Markets closely monitor Tier 1 ratios as key indicators of bank health.