Banking
CET1 capital ratio (and risk-weighted assets)
A bank's highest-quality capital as a share of its risk-weighted assets.
Last reviewedWhat does CET1 capital ratio (and risk-weighted assets) mean?
The Common Equity Tier 1 (CET1) ratio is CET1 capital (mainly common shares and retained earnings, minus deductions such as goodwill) divided by risk-weighted assets (RWA). Risk-weighted assets are the bank's assets with each one scaled by how risky it is: cash and most home-country government bonds can carry a weight of 0 percent, a typical home loan a lower weight such as 35 percent, and a loan to a company with no credit rating 100 percent. Example: a bank with 100 of corporate loans at 100 percent and 200 of home loans at 35 percent has RWA of 100 + 70 = 170. With 20 of CET1 capital, its ratio is about 11.8 percent. Under Basel III, set by the Basel Committee on Banking Supervision, the minimum is 4.5 percent plus a 2.5 percent capital conservation buffer, and national regulators add more for large banks. More capital makes a bank safer but lowers its return on equity.
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Related terms
- Return on equity (ROE)Net income as a share of shareholders' equity.
- Liquidity coverage ratio (LCR)Whether a bank holds enough easy-to-sell assets to survive 30 days of stress.
- Non-performing loan (NPL) ratioThe share of a bank's loans that borrowers have stopped paying.
- Balance sheetWhat a company owns and owes at one point in time.
- Net interest margin (NIM)What a bank earns on its loans and investments after paying for its funding, as a share of those assets.
- Cost-to-income ratioOperating costs as a share of operating income. Lower means a more efficient bank.
- Cost of riskLoan loss charges as a share of loans, usually quoted in basis points.
- Loan-to-deposit ratio (LDR)Loans divided by deposits: how much of its deposit base a bank has lent out.