Capital
Common Equity Tier 1 Capital Ratio
Also known as CET1 Ratio
The CET1 ratio measures a bank's highest-quality capital — common equity, retained earnings, and qualifying disclosed reserves — against its risk-weighted assets. It is the most-watched single capital indicator in US bank supervision after the 2013 Basel III reforms.
Formula
Common Equity Tier 1 (CET1) capital is common shares, retained earnings, and accumulated other comprehensive income, less deductions for goodwill, deferred tax assets above limits, and certain mortgage servicing rights. Risk-Weighted Assets (RWA) assigns each asset a weighting between 0% (cash, US Treasuries) and 1,250% (some securitization tranches) based on its credit risk.
Why it matters
CET1 is the capital banks can absorb losses with first. Regulators set a 4.5% minimum plus a 2.5% capital conservation buffer (effectively a 7% floor), and the largest banks face additional G-SIB surcharges. Banks operating near the minimums face restrictions on dividends, share buybacks, and discretionary bonus payments.
How to interpret
Most well-managed US community banks report CET1 ratios between 11% and 16%. Ratios above 14% generally indicate comfortable capital cushions; below 10% triggers regulatory attention. The CET1 ratio should be read alongside the Tier 1 leverage ratio (which doesn't weight assets by risk), since a bank can have a high CET1 ratio while still being thinly capitalized on a leverage basis.
Thresholds
| Range | Label | Interpretation |
|---|---|---|
| ≥ 13% | Well capitalized | Comfortable buffer above the 7% effective floor. |
| 10–13% | Adequate | Within normal range for most US community banks. |
| 7–10% | Watch | Approaches the conservation buffer; restricts capital distributions. |
| < 7% | Concern | Triggers prompt corrective action protocols. |
Worked example
Frequently asked
What is the difference between CET1 and Tier 1 capital?
Tier 1 capital includes CET1 plus 'Additional Tier 1' instruments — primarily perpetual non-cumulative preferred stock. CET1 is the purest form of bank capital; Tier 1 adds high-quality but less-permanent instruments. For most US community banks the two ratios are within a few basis points.
What CET1 ratio is required to pay dividends?
A bank operating above its capital conservation buffer (7% effective CET1 for most banks) faces no dividend restrictions on capital grounds. Operating inside the buffer triggers a sliding scale of payout restrictions; operating below the minimum triggers Prompt Corrective Action.
How is RWA calculated?
Each asset is multiplied by a risk weight defined in 12 CFR Part 217. Cash and US Treasuries are 0%; most residential mortgages are 50%; most commercial loans are 100%; past-due loans and certain securitization tranches can run to 1,250%. Sum the weighted exposures to get total RWA.
Does CET1 include unrealized gains and losses on securities?
For US banks with assets over $250 billion (Category I and II), yes — AOCI flows through CET1. Smaller banks may opt out via the AOCI election, which is why mid-sized community banks were relatively insulated from the 2022-2023 unrealized loss shock that hit larger AOCI-exposed institutions.
Sources
- FFIEC Call Report Schedule RC-R (Regulatory Capital)
- 12 CFR Part 217 (Federal Reserve Capital Adequacy)
- Basel III: A global regulatory framework (BCBS, 2010)
See CET1 Ratio across 4,394 US banks
BankRegReports ranks every FDIC-insured institution by CET1 Ratio, refreshed quarterly within 48 hours of FFIEC release.