Common Equity Tier 1

Common Equity Tier 1 (CET1) is a key regulatory capital measure used to assess the financial strength and resilience of banks and other financial institutions. It is a component of the capital requirements framework established by international regulatory standards, such as the Basel III framework.

CET1 capital represents the highest quality and most reliable form of capital for financial institutions. It primarily consists of common equity shares and retained earnings, which are considered to be permanent and fully available to absorb losses. CET1 capital is important because it provides a cushion to protect depositors and other stakeholders in the event of financial stress or losses.

Core component of regulatory capital: CET1 capital is the core component of a financial institution's regulatory capital. It forms the foundation for calculating regulatory capital ratios and complying with minimum capital requirements set by regulatory authorities. These ratios include the CET1 ratio, which measures CET1 capital as a percentage of a bank's risk-weighted assets.

Loss absorbency: CET1 capital is designed to absorb losses incurred by a financial institution. In times of financial stress or losses, CET1 capital is available to absorb losses before other forms of capital. This loss-absorbing capacity helps protect depositors and other creditors, ensuring the financial institution's ability to continue operating even in challenging circumstances.

Permanent and fully available capital: CET1 capital is considered permanent and fully available to absorb losses because it primarily consists of common equity shares and retained earnings. These components are not subject to restrictions or contractual obligations that would limit their availability to absorb losses.

Regulatory requirements and minimum standards: Regulatory authorities, such as the Basel Committee on Banking Supervision and national supervisory authorities, define minimum CET1 capital requirements that financial institutions must meet. These requirements are set to ensure financial institutions maintain a sufficient level of high-quality capital relative to their risk exposures.

Capital adequacy ratios: The CET1 ratio is a key capital adequacy ratio that measures a financial institution's CET1 capital as a percentage of its risk-weighted assets. This ratio provides an indication of the institution's capital strength and ability to absorb losses. Higher CET1 ratios signify greater financial resilience and capacity to withstand adverse events.

Regulatory adjustments: Regulatory authorities may apply adjustments to the calculation of CET1 capital to ensure consistency and comparability across financial institutions. These adjustments may include deductions or restrictions on certain components of CET1 capital to account for potential regulatory risks or capital instruments that do not meet regulatory criteria.

CET1 capital is an important measure of a financial institution's capital strength and ability to absorb losses. By maintaining a sufficient level of CET1 capital, banks and other financial institutions enhance their resilience, protect stakeholders, and contribute to the stability of the financial system.