CET1 (Common Equity Tier 1)

Common Equity Tier 1 (CET1) is the highest-quality form of regulatory bank capital — common stock, retained earnings, and accumulated other comprehensive income, less goodwill, intangibles, and certain deferred tax assets — measured against the bank's risk-weighted assets. It is the cornerstone of the Basel III capital framework and the ratio that takes the largest hit during credit-loss episodes because every dollar of loan charge-off flows through earnings, then through retained earnings, then directly through the CET1 numerator.

Why CET1 Matters

CET1 is the buffer that absorbs losses before preferred stock, subordinated debt, or hybrid capital takes a hit. When a bank charges off loans in excess of its ACL, the shortfall flows through provision expense, compresses earnings, and erodes retained earnings — which directly reduces CET1. The ratio's two-step erosion path (provision expense → retained earnings → CET1) is why analysts watch quarter-over-quarter CET1 compression as the leading indicator of distress that cannot be hidden in optical adjustments.

For note investors, the operational signal is straightforward: banks with CET1 compressing toward 7% (the Basel III all-in minimum with conservation buffer) face a binary choice — raise dilutive equity, or sell assets to reduce risk-weighted asset growth. The second path is what generates secondary-market loan-pool inventory.

How is CET1 Calculated?

The formula:

CET1 Ratio = Common Equity Tier 1 Capital / Risk-Weighted Assets

The CET1 numerator is Schedule RC-R item 19, computed as:

• (+) Common stock and surplus
• (+) Retained earnings
• (+) Accumulated other comprehensive income (with elections)
• (−) Goodwill (net of associated deferred tax liabilities)
• (−) Other intangible assets
• (−) Disallowed deferred tax assets
• (−) Threshold deductions (significant investments, MSRs, DTAs)

The denominator is risk-weighted assets — total exposures multiplied by Basel-defined risk weights ranging from 0% (Treasuries) to 1,250% (certain securitization residuals).

A Worked Example

A bank reports $250M of CET1 capital and $2.8B of risk-weighted assets:

CET1 Ratio = $250M / $2,800M = 8.93%

An 8.93% ratio is comfortably above both the 4.5% Basel III minimum and the 7.0% all-in target including the conservation buffer. The same bank with $190M of CET1 would sit at 6.79% — below the all-in target, triggering automatic restrictions on dividend payments and discretionary executive bonuses under the buffer framework.

Basel III Capital Stack

The Basel III framework, codified internationally by the BCBS Basel III publication, layers multiple buffers above the 4.5% CET1 minimum:

For most U.S. community and regional banks, the operational CET1 target is the 7.0% sum of the Basel minimum plus the conservation buffer. The 12 CFR §324 implementation in the U.S. sets the well-capitalized PCA threshold at 6.5% CET1 — a hair below the Basel all-in target, reflecting the FDIC's tiered approach to escalation.

What is the Difference Between CET1 and Tier 1?

CET1 is a subset of Tier 1 capital. The Tier 1 stack:

CET1 absorbs losses first. Additional Tier 1 instruments are designed to absorb losses while the bank is still a going concern (via writedowns or equity conversion). Tier 2 absorbs losses only in resolution. For analysts watching distress timelines, CET1 compression is the metric that matters; Additional Tier 1 and Tier 2 buffers are bond-investor concerns about loss-given-default in receivership.

The Tier 1 leverage ratio uses Tier 1 capital (CET1 + Additional Tier 1) in its numerator but measures against unweighted total assets in the denominator. The CET1 ratio and the Tier 1 leverage ratio answer different questions: CET1 captures capital adequacy relative to risk-weighted exposure; Tier 1 leverage captures capital adequacy relative to raw exposure.

CET1 vs. Tangible Common Equity

CET1 is a regulatory definition; tangible common equity (TCE) is an analyst-defined economic measure. The two are similar — both strip goodwill and intangibles from common equity — but differ in their treatment of AOCI and certain deductions, and CET1 is divided by risk-weighted assets while TCE-based ratios are typically divided by total tangible assets. CET1 is the regulator-watched metric; TCE is the analyst-preferred read on what's actually behind the balance sheet, particularly during periods of large AOCI swings.

How Note Investors Use CET1

Buyer-side workflow:

1. Filter the universe. Rank banks within a peer cohort by CET1 ratio, ascending.
2. Read the trend. A 7.8% CET1 ratio that has dropped from 11.0% over four quarters is a stronger signal than a flat 7.8%.
3. Cross-check Tier 1 leverage and Texas Ratio. Three-symptom compression (CET1 down, Tier 1 leverage down, Texas Ratio up) identifies forced sellers with operational urgency.
4. Outreach. Banks with CET1 below 8% and a deteriorating trend are receptive to bulk inquiry; banks below 7% are typically in active discussions about portfolio dispositions.

See current top 50 banks by capital pressure → Capital-Pressured Institutions.