Common Equity Tier 1 (CET1)
AdvancedAlso known as: CET1 Common Equity Tier 1 (CET1) is the highest-quality form of bank capital, made up mainly of ordinary shares and retained earnings, after deductions for items such as goodwill, and is used to absorb losses while a bank continues operating. Under the Basel framework, bank capital is divided into tiers by quality. CET1 is the core, because it is permanent, has no obligation to pay dividends and is the first to absorb losses. The key measure is the CET1 ratio, which compares CET1 capital with the bank's risk-weighted assets. For example, a bank with 12,000,000,000 of CET1 capital and 100,000,000,000 of risk-weighted assets has a CET1 ratio of 12%. Under Basel III, banks must maintain a minimum CET1 ratio of 4.5%, plus a capital conservation buffer of 2.5%, giving 7% in total. Larger and systemically important banks face additional buffers, and national regulators may add further requirements based on stress tests or economic conditions. The CET1 ratio is one of the most closely watched measures of a bank's financial strength. A bank that falls below its required buffers faces restrictions on paying dividends, buying back shares and paying bonuses until it rebuilds its capital.
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