Tier 1 Capital Santykis Skaičiuotuvas

Tier 1 capital represents a bank's core, highest-quality capital that is permanently available to absorb losses: primarily common equity, retained earnings, and qualifying non-cumulative preferred stock. Tier 2 capital is supplementary capital of lower quality that can absorb losses only in a gone-concern scenario (when the bank is failing). Tier 2 includes instruments like subordinated debt with minimum 5-year maturity, certain convertible instruments, and loan loss reserves up to 1.25% of RWA. Under Basel III, Tier 2 can count toward the total capital ratio (minimum 8%) but is capped at 100% of Tier 1 capital. The critical distinction is that Tier 1 can absorb losses while a bank continues operating, whereas Tier 2 capital only provides protection to creditors during failure.

Under Basel III's standardized approach, risk weights are set by regulators based on the credit risk of each asset class. Cash and central bank deposits: 0%. OECD government bonds: 0%. Bank reserves at central banks: 0%. Residential mortgages (loan-to-value below 80%): 35–50%. Commercial real estate: 100–150%. Corporate loans (investment grade): 100%. Unsecured consumer credit: 75–100%. Non-performing loans: 150%. Equity investments: 100–250%. Highly complex or illiquid assets: 150%+. Banks using the Internal Ratings-Based (IRB) approach can use their own models to estimate risk weights, subject to regulatory approval and minimum output floors. The standardized approach weights are being updated under Basel III's 'finalization' rules (sometimes called Basel IV) to reduce the variability between the standardized and IRB approaches.

Under the Federal Reserve's Prompt Corrective Action (PCA) framework, mandatory and discretionary supervisory actions are triggered as capital ratios decline. A bank with a Tier 1 ratio below 6% but above 4% is classified as 'Undercapitalized' — it must submit a capital restoration plan, cannot grow assets by more than 5% without regulatory approval, and is prohibited from paying dividends or discretionary bonuses. Below 4% Tier 1, a bank becomes 'Significantly Undercapitalized' and faces mandatory requirements to raise capital, restrict interbank borrowing, and may be required to issue new stock or merge with a healthier institution. Below 2% Tier 1 (or insolvent), the bank is classified 'Critically Undercapitalized' and regulators are required to appoint a receiver or conservator within 90 days — effectively placing the bank into FDIC resolution.

The Tier 1 capital ratio uses risk-weighted assets in the denominator, meaning it gives banks credit for holding low-risk assets like government bonds. The supplementary leverage ratio (SLR) uses total exposure — total assets plus off-balance-sheet items — without any risk weighting. This means a bank heavily invested in government securities would have a much higher Tier 1 ratio than leverage ratio, because the 0% risk weight on government bonds drops RWA dramatically while total exposure (for the SLR) is unchanged. Basel III requires banks to maintain an SLR of at least 3%, and U.S. enhanced SLR (eSLR) rules require the 8 largest banks to hold 5% (at the holding company level) and 6% (at the insured depository level). The leverage ratio serves as a backstop against excessive balance sheet growth even in ostensibly low-risk assets.

Banks can improve their Tier 1 ratio through two simultaneous levers: increasing the numerator (Tier 1 capital) or reducing the denominator (risk-weighted assets). Capital-building strategies include: retaining earnings rather than paying dividends, issuing new common equity (dilutive to existing shareholders), issuing qualifying AT1 instruments like perpetual preferred stock or CoCo bonds, and suspending share buybacks. RWA reduction strategies include: selling or securitizing riskier loan portfolios, shifting the asset mix toward lower-risk assets (government bonds instead of corporate loans), reducing off-balance-sheet exposures, and using credit risk mitigation tools like guarantees or collateral agreements. Banks also reduce regulatory deductions (goodwill, deferred tax assets) by avoiding acquisitions that create intangibles or by generating taxable income to realize deferred tax benefits.

Stress tests are regulatory exercises that project how a bank's capital ratios would change under severely adverse economic scenarios — typically a 10% unemployment rate, a 50% stock market decline, and a severe recession. In the U.S., the Federal Reserve conducts annual stress tests under the Dodd-Frank Act Stress Test (DFAST) and Comprehensive Capital Analysis and Review (CCAR) for banks with $100B+ in assets. The Fed models each bank's losses across its entire portfolio under hypothetical scenarios and determines the minimum capital ratio the bank would reach. Banks must demonstrate that even under the severely adverse scenario, their CET1 ratio does not fall below 4.5%. The stress test results determine each bank's Stress Capital Buffer (SCB), which is added to the minimum CET1 requirement, typically resulting in effective CET1 requirements of 7–10% for large banks.

The Basel III framework sets a global floor, but implementation details vary by jurisdiction. U.S. banks are subject to rules issued by the Federal Reserve, OCC, and FDIC that incorporate Basel III with certain American-specific modifications. European banks follow the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD) implementing Basel III within the EU. Some jurisdictions apply stricter rules — for example, Switzerland's 'Swiss Finish' requires the country's largest banks to maintain CET1 ratios well above Basel minimums. Emerging market banks often face similar minimums but may have different definitions of qualifying capital instruments. The Basel Committee on Banking Supervision (BCBS) publishes regular implementation monitoring reports assessing how consistently member nations apply the framework, highlighting remaining international differences.