CET1 Capital
CET1 capital is the highest quality form of regulatory capital, consisting mainly of common equity and retained earnings.
Meaning in Practice
Common Equity Tier 1 (CET1) capital includes ordinary shares, retained earnings, and other comprehensive income, adjusted for regulatory deductions. It represents the core loss-absorbing buffer of a bank. Regulators require banks to maintain minimum CET1 ratios relative to risk-weighted assets.
Why It Matters
CET1 capital is critical for a bank’s resilience during financial stress. A strong CET1 position enhances solvency and protects depositors and creditors. It is a key metric used by regulators and investors to assess capital strength.
Market Impact
Higher CET1 ratios generally improve investor confidence and can lower funding costs. Weak CET1 levels may trigger capital raising, dividend restrictions, or supervisory intervention. Market reactions to CET1 disclosures often influence bank equity and bond prices.
Example
If a bank reports a CET1 ratio of 14 percent, it means its core equity capital equals 14 percent of its risk-weighted assets, exceeding the regulatory minimum requirement.