What Is Common Equity Tier 1 (CET1)? CET1 Ratio and Calculation
By Markets & Investing DeskUpdated Nov 10, 2026
Definition
Common Equity Tier 1 (CET1) is a bank's highest-quality capital, mainly common shares and retained earnings. The CET1 ratio divides it by risk-weighted assets.
Key takeaways
- Basel III requires a CET1 ratio of at least 4.5%, plus a 2.5% capital conservation buffer.
- Goodwill, intangibles and certain deferred tax assets are deducted, so CET1 is usually below book equity.
- Losses hit CET1 first, before they reach AT1 holders, Tier 2 creditors or depositors.
- Dipping into the buffer zone triggers automatic limits on dividends, buybacks and bonuses.
Common Equity Tier 1 (CET1) is the highest-quality layer of a bank’s regulatory capital. It consists mainly of common shares and retained earnings, minus deductions for assets that might not hold their value in a crisis. The CET1 ratio divides that capital by the bank’s risk-weighted assets (RWAs) and shows how much loss-absorbing equity stands behind each dollar of risk the bank carries. Under the Basel III framework, a bank must keep a CET1 ratio of at least 4.5%, with additional buffers stacked on top.
What CET1 Capital Includes
CET1 is built from the items a bank never has to repay and that absorb losses without any legal process:
- Common shares issued by the bank
- Share premium (stock surplus) from issuing those common shares
- Retained earnings
- Accumulated other comprehensive income (AOCI), such as unrealized gains and losses on certain securities
- Qualifying common shares issued by consolidated subsidiaries and held by outside investors (minority interest, within limits)
Regulators then subtract regulatory adjustments. The main deductions are goodwill, other intangible assets, certain deferred tax assets, and significant investments in other financial institutions above set thresholds. These items appear on the balance sheet but could be worth little if the bank failed, so they are excluded. This is why a bank’s CET1 capital is usually smaller than the shareholders’ equity on its balance sheet.
Where CET1 Sits in the Capital Stack
Basel III splits regulatory capital into two tiers:
- Tier 1 (going-concern capital) absorbs losses while the bank keeps operating. It has two parts:
- CET1: common equity, as described above.
- AT1: instruments that are not common equity but meet strict conditions, such as perpetual maturity and fully discretionary coupons. Contingent convertible bonds (CoCos) are the typical example. They convert to equity or are written down when CET1 falls below a stated trigger level.
- Tier 2 (gone-concern capital) absorbs losses mainly when the bank is being resolved or liquidated. It includes subordinated debt with a minimum original maturity and certain loan-loss reserves.
CET1 is the bottom of the loss-absorption order. Losses reduce retained earnings and therefore CET1 before they reach AT1 holders, Tier 2 creditors or depositors. In insolvency, common shareholders are wiped out first.
Calculating the CET1 Ratio
The CET1 ratio formula is:
CET1 ratio = CET1 capital ÷ Risk-weighted assets × 100
The denominator is the harder part. Instead of using total assets, a bank assigns each exposure a risk weight according to how likely it is to produce losses. It then adds capital charges for market risk and operational risk. Under the standardized approach, cash and highly rated sovereign bonds can carry a 0% weight. Residential mortgages carry lower weights than unsecured corporate loans, and higher-risk exposures can be weighted above 100%. Large banks approved to use internal models estimate many of these weights themselves, within regulatory limits.
Worked example (hypothetical bank)
CET1 capital (figures in billions):
| Item | Amount |
|---|---|
| Common shares and share premium | $6.0 |
| Retained earnings | $6.0 |
| AOCI | $0.5 |
| Less goodwill and intangibles | ($2.0) |
| Less deductible deferred tax assets | ($0.3) |
| CET1 capital | $10.2 |
Risk-weighted assets (illustrative weights):
- $20B government bonds × 0% = $0
- $40B residential mortgages × 35% = $14B
- $50B corporate loans × 100% = $50B
- Market and operational risk charges = $16B
- Total RWAs = $80B
The bank holds $110B of these assets, but its RWAs are only $80B.
CET1 ratio = 10.2 ÷ 80 = 12.75%
Suppose the bank also has $1.5B of AT1 and $2B of Tier 2. Its Tier 1 ratio is then 11.7 ÷ 80 = 14.6%, and its total capital ratio is 13.7 ÷ 80 = 17.1%.
Loss scenario: a $4B loan loss flows straight through retained earnings, cutting CET1 to $6.2B. With RWAs unchanged at $80B, the CET1 ratio drops to 7.75%. That is only just above the 7% that combines the 4.5% minimum and the 2.5% conservation buffer, and the AT1 and Tier 2 layers are untouched.
The bank could raise its ratio by adding capital, through retained profits or a share issue, or by cutting RWAs through selling or shrinking high-weight assets.
Minimum Requirements and Buffers
Basel III sets the floor, and national regulators implement it, often with additions:
| Layer | Requirement (% of RWAs) |
|---|---|
| CET1 minimum | 4.5% |
| Tier 1 minimum | 6.0% |
| Total capital minimum | 8.0% |
| Capital conservation buffer (CET1) | 2.5% |
| Countercyclical buffer (CET1) | 0% to 2.5%, set by each jurisdiction |
| Systemic surcharge for global systemically important banks (CET1) | Additional, by bank category |
Supervisors can also impose bank-specific add-ons after reviewing a bank’s risks. A bank’s actual CET1 requirement is therefore often well above 4.5%.
Because Basel III was phased in over several years after the 2007 to 2008 financial crisis, older reports distinguish transitional ratios from fully loaded ratios, which apply all the final deductions.
How the CET1 Ratio Is Used
Supervision. When CET1 dips into the buffer zone, automatic restrictions apply to distributions such as dividends, share buybacks and discretionary bonuses. The deeper the shortfall, the tighter the restrictions. A breach of the minimum itself leads to supervisory action, which can include a required recapitalization, restructuring or resolution.
Stress tests. The European Banking Authority in the EU and the Federal Reserve in the US project how each bank’s CET1 ratio would evolve under a severe hypothetical recession. A bank’s lowest projected CET1 ratio during the scenario helps determine its capital buffers and how much it may pay out to shareholders.
Investors and analysts. CET1 is the standard headline figure for comparing bank solvency. Equity analysts watch surplus capital above requirements because it supports dividends and buybacks. AT1 holders watch the distance between the current ratio and the conversion or write-down trigger.
What a Low or High CET1 Ratio Means
A low CET1 ratio leaves a thin cushion against losses. Even a moderate shock could push the bank toward its buffer or minimum and force it to cut dividends, raise capital at an unfavorable time or shrink lending.
A high ratio signals resilience. It also means more equity is funding the same assets, which can lower return on equity. Banks therefore usually aim for a management target somewhat above their regulatory requirement, not for the highest possible ratio.
Limitations
- Risk weights are estimates. Two banks with identical loans can report different RWAs if they use different internal models. Their CET1 ratios are then not directly comparable. This concern led to output floors in the final Basel III reforms.
- It measures solvency, not liquidity. A bank can have a strong CET1 ratio and still face a funding run. Liquidity is covered by separate measures, such as the liquidity coverage ratio.
- It is a snapshot. Ratios are reported at quarter-end and can change quickly as markets move.
- Accounting choices matter. The treatment of unrealized losses on securities differs by jurisdiction and bank category. A reported ratio can therefore overstate the capital that would be left if those securities had to be sold.
CET1 vs. Related Measures
- CET1 vs. Tier 1 capital: the Tier 1 ratio adds AT1 to the numerator, so it is never lower than the CET1 ratio and equals it only when a bank has no AT1.
- CET1 ratio vs. total capital ratio: the total capital ratio counts Tier 1 plus Tier 2 against RWAs. It is the classic capital adequacy ratio with its 8% Basel minimum.
- CET1 ratio vs. leverage ratio: the leverage ratio divides Tier 1 capital by total exposures with no risk weighting. Basel III sets its minimum at 3%. It acts as a backstop when risk weights understate risk.
FAQs
Can a bank's CET1 ratio fall without any losses?
Yes. If RWAs grow faster than capital, the ratio declines even when the bank is profitable. This can happen when lending expands, when borrowers' credit quality worsens and pushes risk weights up, or when model or rule changes raise RWAs. Large dividends or buybacks also reduce CET1 directly.
The Bottom Line
CET1 matters to bank investors, analysts, AT1 holders and supervisors because it is the standard headline measure of bank solvency. A ratio comfortably above requirements protects payouts and absorbs shocks, while a thin cushion can force dividend cuts or capital raises. Readers should still compare it with liquidity and leverage measures, since risk weights are estimates and the ratio is only a quarter-end snapshot.
