Concept · Full explanationRelevant to you
CET1 (Common Equity Tier 1)
Common Equity Tier 1 is the highest quality layer of a bank's own funds: ordinary shares, share premium, retained earnings and other reserves, minus regulatory deductions. The CET1 ratio divides it by risk-weighted assets and must be at least 4.5% under the CRR, before buffers and Pillar 2.
See related concepts
What it is
Common Equity Tier 1 (CET1) is the part of a bank’s capital that absorbs losses first and without conditions. It is made of paid-up ordinary shares, share premium, retained earnings, accumulated other comprehensive income and other disclosed reserves. Articles 26 to 50 of the Capital Requirements Regulation (CRR) list what counts and what must be deducted.
Deductions remove items that would not hold value in a crisis. Examples are goodwill and other intangible assets, deferred tax assets that rely on future profits, and significant holdings in other financial firms above set thresholds.
The CET1 ratio is CET1 capital divided by total risk-weighted assets (RWA). The CRR minimum is 4.5%. Banks also hold combined buffers (capital conservation, countercyclical, systemic) and a Pillar 2 requirement, all partly or fully in CET1.
Why it matters
CET1 is the number supervisors, investors and rating agencies look at first. Falling into the combined buffer triggers limits on dividends, bonuses and coupons through the maximum distributable amount. A bank that falls below its total requirement can face supervisory action or resolution. CET1 also drives the cost of growth: every new loan uses RWA, and RWA consumes CET1.
Worked example
Illustrative numbers.
- RWA: 10,000 million euro.
- CET1 capital after deductions: 1,200 million. CET1 ratio: 1,200 / 10,000 = 12.0%.
- Requirement: Pillar 1 4.5% + Pillar 2 requirement in CET1 1.125% (56.25% of a 2% P2R) + capital conservation buffer 2.5% + countercyclical buffer 1.0% = 9.125%.
- Headroom: 12.0% minus 9.125% = 2.875%, or about 288 million euro of CET1.
If the bank adds 1,000 million of RWA, required CET1 rises by about 91 million and the ratio falls to 1,200 / 11,000 = 10.9%.
Who uses it
- Capital reporting analysts compute CET1 and file it in the COREP own funds templates each quarter.
- Regulatory reporting analysts reconcile the figures with the accounts and the Pillar 3 disclosure.
- ALM and treasury analysts plan issuance, dividends and buybacks against CET1 headroom.
- Credit risk analysts translate lending growth into RWA and CET1 consumption.
- Regulatory consultants run impact studies when rules such as CRR3 change.
Common confusions
- CET1 capital is an amount; the CET1 ratio is that amount over RWA. Headlines usually mean the ratio.
- Accounting equity and CET1 differ. Deductions and filters can make CET1 much smaller than book equity.
- Tier 1 includes CET1 plus Additional Tier 1 instruments. Total capital adds Tier 2.
- The 4.5% minimum is the floor of the stack. The ratio a bank must actually keep, including buffers and Pillar 2, is usually much higher.
- The leverage ratio uses Tier 1 over total exposure, with no risk weights, and is a separate constraint.
Sources
Updated 31 Oct 2026.
Own funds (regulatory capital)Own funds are the capital a bank or investment firm can count towards its prudential requirements under the CRR. They are the sum of Tier 1 capital (CET1 plus Additional Tier 1) and Tier 2 capital, after deductions and regulatory filters. Synonyms: regulatory capital, total capital.
Risk-weighted assets (RWA)Risk-weighted assets measure a bank's exposures adjusted for risk: each exposure is multiplied by a risk weight that reflects its credit, operational or other risk. Capital ratios divide capital by RWA, so RWA also sets how much capital a bank must hold. Also called risk exposure amount.
CRR (Capital Requirements Regulation)The Capital Requirements Regulation, Regulation (EU) No 575/2013, sets the directly applicable EU rules on own funds, capital requirements, liquidity, leverage, large exposures, reporting and disclosure for banks and investment firms. It applies the Basel standards across the single market.
Pillar 2 (P2R and P2G)Pillar 2 covers risks not captured, or not fully captured, by Pillar 1. Supervisors set a binding Pillar 2 requirement (P2R) after the SREP, and a non-binding Pillar 2 guidance (P2G) informed by stress tests. Both are expressed as a share of risk-weighted assets.
Deferred taxDeferred tax is the tax effect of temporary differences between the accounting carrying amount of assets and liabilities and their tax base. IAS 12 recognises deferred tax liabilities and, when future taxable profit is probable, deferred tax assets, including those from tax losses.
Maximum distributable amount (MDA)The maximum distributable amount caps dividends, variable pay and AT1 coupons when a bank does not meet its combined buffer requirement. The further capital falls into the buffers, the lower the share of profits that can be paid out. The MDA trigger is closely watched by AT1 investors.
Pillar 1 (minimum capital requirements)Pillar 1 is the part of the Basel framework that sets minimum capital requirements for credit risk, operational risk and other risks with prescribed methods. In the EU the minimums are 4.5% CET1, 6% Tier 1 and 8% total capital as a share of risk-weighted assets.
COREP (Common Reporting)COREP is the EU harmonised supervisory reporting framework for own funds and capital requirements of banks and investment firms under the CRR. It is set out in EBA implementing technical standards and submitted in XBRL to national supervisors, mostly every quarter.
Asset and liability management (ALM)Asset and liability management is the management of a balance sheet's interest rate, liquidity and funding risks so that assets and liabilities fit together in maturity, currency and rate. ALM teams run the ALCO (asset and liability committee), hedging and funds transfer pricing.
CRR3CRR3 is Regulation (EU) 2024/1623, the amendment to the Capital Requirements Regulation that implements the final Basel III reforms in the EU. It revises the standardised approach for credit risk, limits internal models, introduces the output floor and replaces the operational risk approaches, mostly applying from 1 January 2025.
Additional Tier 1 (AT1)Additional Tier 1 capital consists of perpetual instruments that absorb losses while the bank is still a going concern, through conversion into shares or a write-down when CET1 falls below a trigger. Together with CET1 it forms Tier 1 capital. AT1 bonds are also called contingent convertibles or CoCos.
Leverage ratioThe leverage ratio is Tier 1 capital divided by total exposure, measured without risk weights and including off-balance-sheet items. The EU minimum is 3%, with an extra buffer for global systemically important banks. It is a backstop against risk weights that turn out too low.