Capital
Tier 1 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.
How is Tier 1 Capital calculated?
CET1 is common stock, retained earnings, and qualifying AOCI, less deductions. AT1 adds perpetual non-cumulative preferred stock and certain hybrids. The total is reported on Schedule RC-R and drives both the tier 1 risk-based ratio (vs. RWA) and the leverage ratio (vs. average assets).
Why does Tier 1 Capital matter?
Tier 1 is the capital regulators care about most for a going concern. It must be available to absorb losses without the bank failing. Its size relative to risk-weighted assets and to total assets determines whether a bank is well capitalized and free to pay dividends.
This page covers the dollar amount of tier 1 capital. Its common equity layer, measured against risk-weighted assets, is the CET1 ratio, the most-watched capital measure, which has its own page.
How do you interpret Tier 1 Capital?
Read the dollar figure through the ratios it feeds. A growing tier 1 base funded by retained earnings is healthy; one propped up by preferred stock (a wide CET1-to-tier-1 gap) is less flexible. The amount only means something against the bank's risk-weighted assets.
What do Tier 1 Capital levels indicate?
| Range | Label | Interpretation |
|---|---|---|
| Ample vs. RWA & assets | Strong | Comfortably above well-capitalized minimums on both ratios. |
| Adequate | Adequate | Tier 1 ratios within the normal range. |
| Thin | Watch | Tier 1 approaching regulatory buffers. |
| Deficient | Concern | Below minimums; triggers prompt corrective action. |
Worked example
Frequently asked
What is the difference between Tier 1 capital and CET1?
CET1 is the highest-quality slice, common equity and retained earnings less deductions. Tier 1 adds Additional Tier 1 instruments such as perpetual preferred stock. Tier 1 is therefore equal to or larger than CET1.
How is Tier 1 capital different from total equity?
Total equity is the book accounting figure. Tier 1 capital starts from common equity but removes goodwill, most intangibles, and certain deferred tax assets, so it is a stricter, loss-absorbing measure.
Sources
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