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What is the CET1 ratio? Bank capital, explained simply
The Common Equity Tier 1 (CET1) ratio is the single most important number in banking regulation. It measures how much of a bank's own money — its core equity — stands between its depositors and the losses on its loans.
The formula
CET1 ratio = CET1 capital ÷ risk-weighted assets
- CET1 capital is the highest-quality capital: ordinary shares plus retained earnings, minus deductions such as goodwill and other intangible assets (which cannot absorb losses in a crisis).
- Risk-weighted assets (RWA) are the bank's assets, each multiplied by a risk weight. Cash and safe government bonds carry low or zero weights; a well-secured mortgage carries a modest weight; an unsecured business loan carries a full weight.
Why capital matters: equity absorbs losses
A bank with 100 of assets funded by 92 of deposits and 8 of equity can lose 8 before depositors are at risk. Lose 9 and the bank is insolvent. That is why banks almost never die of low profits — they die of losses larger than their capital. Capital is the shock absorber, and the thinner it is, the smaller the shock that breaks the bank.
How much is required?
| Layer (Basel III) | CET1 as % of RWA |
|---|---|
| Minimum requirement | 4,5% |
| + Capital conservation buffer | 2,5% |
| + Countercyclical buffer (set nationally) | 0–2,5% |
| + Systemic buffers (e.g. G-SIB surcharge) | 1–3,5% for G-SIBs |
| + Supervisory add-ons (Pillar 2) | bank-specific |
In practice most large banks run CET1 ratios well above the minimum — often in the low-to-mid teens — because falling into the buffers triggers restrictions on dividends and bonuses, and markets punish thin capital long before the regulator does.
Three ways a CET1 ratio falls
- Losses reduce equity directly (credit losses, trading losses, fines).
- Growth increases RWA: lending faster than profits can build capital pushes the ratio down even in good times.
- Payouts: dividends and buybacks return capital to shareholders.
And three ways to raise it: retain profits, issue new shares, or shrink/de-risk the balance sheet.
CET1 vs the leverage ratio
Risk weights can be wrong — before 2008 many “safe” assets turned out not to be. So regulators added the leverage ratio: Tier 1 capital divided by total exposure with no risk weights, with a 3% minimum. A bank full of low-risk-weighted assets can have a healthy CET1 ratio and still hit the leverage floor.
Frequently asked questions
What is a good CET1 ratio?
Above the regulatory requirement plus a comfortable management buffer. Large European banks typically run CET1 ratios around 13–16%; anything within 1–2 percentage points of the requirement is considered thin.
Why is goodwill deducted from CET1?
Goodwill is the premium paid in acquisitions. It is an accounting asset but cannot be sold to cover losses in a crisis, so regulators deduct it from core capital.
What happens if a bank falls below its CET1 requirement?
Restrictions on dividends, bonuses and buybacks start as soon as a bank dips into its buffers. Below the minimum, supervisors demand a recovery plan and can ultimately put the bank into resolution.