Common equity tier 1
The highest-quality bank capital: common shares and retained earnings, less deductions such as goodwill. Basel III sets minimum ratios of it to risk-weighted assets, because it absorbs losses while the bank keeps operating.
Where you will meet it
Common equity tier 1 appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Explain ratios specific to particular industries and how ratios help forecast earnings
“Retailers are judged on same-store sales growth and sales per square metre; hotels on occupancy and revenue per available room, which is occupancy times the average daily rate; airlines on load factor and revenue per available seat mile; banks on net interest margin and on capital ratios such as common equity Tier 1 capital divided by risk-weighted assets.”
- Explain the main features of how financial institutions are regulated
“Capital is measured against risk-weighted assets: common equity Tier 1 of at least 4.5%, Tier 1 of at least 6% and total capital of at least 8%, with a conservation buffer on top.”
- Explain the CAMELS approach to bank analysis, which covers capital adequacy, quality of assets, management, earnings, liquidity and sensitivity, with its main ratios and its limitations
“Capital adequacy uses CET1, Tier 1 and total capital ratios over risk-weighted assets.”
See also
Goodwill · Retained earnings · Risk-weighted assets
Practise it
Practise common equity tier 1 until it is automatic: questions that explain every wrong option.
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