What Is the Tier 1 Capital Ratio?

The Tier 1 Capital Ratio is a financial institution's core capital divided by its risk-weighted assets (RWA). Regulators use it to ensure financial stability in the system by requiring financial institutions to have a ratio above a certain threshold. A higher ratio implies more safety.

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Various denominations of U.S. currency superimposed over one another in a pile. — Image source: Getty Images.

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The Basel Committee on Banking Supervision comprises central bankers and regulatory authorities dedicated to improving banking supervision. It issues frameworks (the Basel Accords) to set capital adequacy standards, including the Tier 1 Capital Ratio. The Basel III accord set a Tier 1 Capital Ratio of 6%. However, as you shall see, top banks seek to exceed this ratio to add extra security.

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Financial Institution

Financial institutions help keep the economy running efficiently, by pairing money with people and companies that need it.

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Data source: Bank for International Settlements.
Regulatory Capital Category	Requirement
Common Equity Tier 1 (CET1)	CET1>4.5% Risk Weighted Assets
Additional Tier 1 (AT1)	CET1+AT1>6% Risk Weighted Assets
Tier 2	CET1+AT1+Tier 2>8%

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Data source: Company Presentations. CET1 = Common equity Tier 1. AT1 = additional Tier 1.
Bank	CET1 Capital Ratio	Tier 1 Capital (CET1+AT1) Ratio	Total Capital (CET1+AT1+Tier 2) Ratio
Citigroup	12%	13.6%	15.2%
JPMorgan Chase	13.8%	15.3%	17.3%
HSBC	14.7%	17%	19.3%

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All three banks have ratios significantly over the Basel III requirements, and the figures give a helpful look at how much (going concern) capital the banks have to deal with losses in their businesses. That's the underlying purpose of the Tier 1 Capital Ratio.

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About the Author

Lee Samaha is a contributing Stock Market Analyst at The Motley Fool covering industrials, electricals, energy, materials, transportation, and infrastructure stocks. Prior to The Motley Fool, Lee was a Civil Engineer and Investment Manager. He holds a Bachelor of Civil and Structural Engineering from Southampton University and a Certificate in Investment Management from Chartered Institute for Securities & Investment. Lee first cut his investing teeth on The Motley Fool bulletin boards (commonly referred to as the “Fool Boards,”) and he’s infinitely grateful to all of the investors he learned from in this powerful investing community.

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