---
title: "Common Equity Tier 1 Capital: definition, formula, and thresholds"
description: "Common equity tier 1 (CET1) capital is the highest-quality, most loss-absorbing capital a bank holds: common stock, retained earnings, and qualifying AOCI, less regulatory deductions. It is the dollar base behind the CET1 ratio, the single most-watched capital measure."
canonical_url: https://www.bankregreports.com/glossary/common-equity-tier1-capital/
source: BankRegReports
category: "Capital"
units: "$"
schedule: "Schedule RC-R"
---

# Common Equity Tier 1 Capital

> Common equity tier 1 (CET1) capital is the highest-quality, most loss-absorbing capital a bank holds: common stock, retained earnings, and qualifying AOCI, less regulatory deductions. It is the dollar base behind the CET1 ratio, the single most-watched capital measure.

## Formula

```
CET1 Capital = Common Stock + Retained Earnings + Qualifying AOCI - Goodwill - Most Intangibles - Certain DTAs
```

Schedule RC-R builds CET1 from common equity and then strips out items that cannot absorb losses: goodwill, most other intangibles, and deferred tax assets above limits. Category I and II banking organizations must include AOCI; all other banks may make the one-time AOCI opt-out election.

## Why it matters

CET1 is the capital banks absorb losses with first, so regulators anchor the post-Basel III framework on it. The CET1 amount, measured against risk-weighted assets, sets the most important capital ratio and the thresholds for dividends, buybacks, and bonuses.

## How to read it

The dollar CET1 figure matters only against risk-weighted assets, that quotient is the CET1 ratio. Track how CET1 is built: retained-earnings growth is durable, while reliance on AOCI swings (at larger banks) makes the base sensitive to interest rates.

## Thresholds

| Range | Reading | What it means |
|---|---|---|
| Growing organically | Strong | CET1 building from retained earnings, well above minimums. |
| Stable, adequate | Adequate | CET1 ratio comfortably within range. |
| Pressured | Watch | CET1 dented by AOCI or weak earnings. |
| Deficient | Concern | CET1 below the 7% effective floor; distributions restricted. |


## Worked example

A bank with $200 million of common equity and retained earnings, carrying $15 million of goodwill and $5 million of other intangibles, reports roughly $180 million of CET1 capital after deductions, the figure divided by risk-weighted assets to get its CET1 ratio.

## Questions

### Why is goodwill deducted from CET1?

Goodwill and most intangibles cannot absorb losses or be sold for value in a failure, so the rules remove them from CET1 to leave only genuinely loss-absorbing capital.

### Does CET1 capital include preferred stock?

No. Preferred stock is Additional Tier 1, not CET1. CET1 is restricted to common equity, retained earnings, and qualifying accumulated other comprehensive income, less deductions.

## Sources

- [FFIEC Call Report Schedule RC-R (Regulatory Capital)](https://www.ffiec.gov/sites/default/files/data/reporting-forms/FFIEC031_FFIEC041_202606_i.pdf) (PDF)
- [12 CFR Part 217 (Basel III Capital Rules)](https://www.ecfr.gov/current/title-12/part-217)

## Related metrics

- [Common Equity Tier 1 Capital Ratio](https://www.bankregreports.com/glossary/cet1-ratio/): The CET1 ratio measures a bank's highest-quality capital (common stock and surplus, retained earnings and, for banks that have not opted out, accumulated other comprehensive income, less regulatory deductions) against its risk-weighted assets. It is the most-watched single capital indicator in US bank supervision after the 2013 Basel III reforms.
- [Tier 1 Capital](https://www.bankregreports.com/glossary/tier1-capital/): Tier 1 capital is a bank's core, going-concern capital: its highest-quality common equity plus additional tier 1 instruments such as perpetual preferred stock. It is the capital that absorbs losses while the bank keeps operating, and it is the numerator of the tier 1 risk-based and leverage ratios.
- [Risk-Weighted Assets](https://www.bankregreports.com/glossary/risk-weighted-assets/): Risk-weighted assets (RWA) are a bank's assets and off-balance-sheet exposures, each multiplied by a risk weight set in the capital rules. RWA is the denominator of the CET1, tier 1 and total capital ratios, so it sets how much capital a bank must hold for the risks it takes.
- [Tangible Common Equity](https://www.bankregreports.com/glossary/tangible-common-equity/): Tangible common equity (TCE) is a bank's total equity minus preferred stock, goodwill and other intangible assets. It is the common shareholders' capital that would remain if the intangible assets were written off, and the measure analysts use to compare banks that grew by acquisition with banks that did not.
- [Total Equity Capital](https://www.bankregreports.com/glossary/total-equity/): Total equity capital is the bank's net worth on a book basis: common stock, surplus, retained earnings, and accumulated other comprehensive income (AOCI). It is the first cushion that absorbs losses before depositors or the FDIC are exposed.

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