Capital
Common Equity Tier 1 Capital
Also known as CET1 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.
How is Common Equity Tier 1 Capital calculated?
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 does Common Equity Tier 1 Capital matter?
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 do you interpret Common Equity Tier 1 Capital?
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.
What do Common Equity Tier 1 Capital levels indicate?
| Range | Label | Interpretation |
|---|---|---|
| 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
Frequently asked
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
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