Tier 1 Capital Ratio

Tier 1 Capital Ratio is a measure of a bank’s core Equity Capital compared to its total risk-weighted Assets (RWAs). It is a key indicator of a bank’s financial strength and stability, reflecting the bank’s ability to absorb losses while maintaining operations.

The formula for calculating the Tier 1 Capital Ratio is:

Tier 1 Capital Ratio = (Tier 1 Capital / Total Risk-Weighted Assets) x 100

Tier 1 Capital primarily includes common Equity (such as common Stock and Retained Earnings) and is considered the most reliable form of Capital in terms of a bank’s ability to withstand financial stress.

Examples:

  • If a bank has Tier 1 Capital of $10 million and total RWAs of $100 million, the Tier 1 Capital Ratio would be:

    • Tier 1 Capital Ratio = ($10 million / $100 million) x 100 = 10%

  • In another case, a bank with Tier 1 Capital of $15 million and total RWAs of $75 million would have a Tier 1 Capital Ratio of:

    • Tier 1 Capital Ratio = ($15 million / $75 million) x 100 = 20%

Regulatory Standards: Under Basel III, banks are generally required to maintain a minimum Tier 1 Capital Ratio of 6%. Higher ratios are viewed favorably by regulators and investors as indicators of financial health.