Common equity tier 1 (CET1).

In plain English

Common equity tier 1 is the capital that absorbs losses first, which is why regulators treat it as the core test of whether a bank can survive a bad year. It counts common shares and retained earnings, then subtracts items that would not be there in a crisis, such as goodwill and certain deferred tax assets. The ratio compares that capital with risk-weighted assets, where a Treasury security carries a low weight and an unsecured business loan carries a high one. A bank that falls below its required ratio faces limits on dividends and buybacks before it faces anything harsher. Higher is safer and also less profitable per dollar of equity, which is the trade regulators are managing.

01Why it matters

This ratio is the clearest single indicator of whether a bank holding your deposits can absorb a wave of loan losses without needing rescue, and it is disclosed publicly every quarter.

02The math, step by step

Say a bank has $12 billion of common equity tier 1 and $150 billion of risk-weighted assets. The ratio is 12 divided by 150, or 8 percent. A $6 billion loss cuts capital to $6 billion and the ratio to 4 percent, which would put dividends at risk immediately.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

Every figure on this page is sourced to a primary document. Tap to open the original.