Every U.S. bank must hold a minimum amount of its own money as a cushion against losses, and federal regulation sets three hard floors: a common equity tier 1 ratio of at least 4.5%, a tier 1 capital ratio of at least 6%, and a total capital ratio of at least 8%, all measured against risk-weighted assets. Those are the core bank capital requirements under 12 CFR Part 217. They are also just the starting point. Layered on top are conservation buffers, stress-based buffers, surcharges for the largest institutions, and a separate leverage ratio, which together push the effective target for most large banks well above 10% CET1.
The Tiers of Capital That Count
Regulators sort bank capital by how quickly and reliably it can absorb losses.
Common Equity Tier 1 (CET1) is the highest quality. It is common stock, retained earnings, and certain other comprehensive income items, and it absorbs losses the moment they occur, with no repayment obligation attached.1Bank for International Settlements. Definition of Capital in Basel III – Executive Summary It is the number regulators watch most closely.
Additional Tier 1 (AT1) capital sits just below CET1 and includes perpetual instruments such as contingent convertible bonds, which have no maturity date and can absorb losses while the bank keeps operating. CET1 plus AT1 equals total Tier 1 capital, which regulators treat as “going-concern” capital.1Bank for International Settlements. Definition of Capital in Basel III – Executive Summary
Tier 2 capital is the secondary layer. It includes subordinated debt with an original maturity of at least five years and qualifying loan-loss provisions. Because Tier 2 instruments generally absorb losses only during a resolution, regulators call this “gone-concern” capital and cap how much can count toward total capital requirements.1Bank for International Settlements. Definition of Capital in Basel III – Executive Summary
Some items get subtracted from CET1 rather than added. Goodwill and other intangibles are deducted because a brand name cannot cover loan losses. Deferred tax assets face deductions because their value depends on future profitability. Significant investments in other financial institutions are capped so the same capital cannot be counted twice across the system.1Bank for International Settlements. Definition of Capital in Basel III – Executive Summary
How Risk-Weighted Assets Work
The capital ratios are not measured against a bank’s raw total assets. Each asset gets a risk weight that reflects how likely it is to lose value, and the weighted total becomes the denominator in every ratio.
Cash held in the bank’s own vaults and exposures to the U.S. government, including Treasury bonds, carry a 0% risk weight. A qualifying first-lien residential mortgage on an owner-occupied property that is current and prudently underwritten carries 50%. Corporate loans carry a full 100%. Mortgages that fall outside the qualifying criteria, including junior liens and loans 90 or more days past due, jump to 100% as well.2eCFR. 12 CFR 217.32 – General Risk Weights
The practical effect is large. A bank with $1 billion in Treasuries has $0 in risk-weighted assets from that portfolio; the same bank with $1 billion in corporate loans has $1 billion. Two institutions with identical balance sheet totals can face very different capital requirements based on what they actually hold. That is the design: riskier lending should require a bigger cushion.
The Minimum Ratios and the Buffers on Top
The three federal floors apply to every bank at all times:3eCFR. 12 CFR 217.10 – Minimum Capital Requirements
- CET1 ratio of at least 4.5% of risk-weighted assets
- Tier 1 capital ratio of at least 6% of risk-weighted assets
- Total capital ratio of at least 8% of risk-weighted assets
No well-managed bank actually operates at those levels, because several buffers stack on top and dipping into any of them triggers automatic restrictions on dividends, share buybacks, and discretionary bonus payments.
Capital Conservation Buffer
Every bank must hold a 2.5% capital conservation buffer above the minimums, made up entirely of CET1. That pushes the effective CET1 target to 7%, the Tier 1 target to 8.5%, and the total capital target to 10.5%. Inside the buffer range, regulators impose graduated payout restrictions, and at the low end the bank cannot distribute any earnings at all.4eCFR. 12 CFR 217.11 – Capital Conservation Buffer and Countercyclical Capital Buffer Amount
Countercyclical Capital Buffer
The Federal Reserve can add a countercyclical buffer of up to 2.5% during periods of excessive credit growth. The U.S. has never activated it above 0%.5Federal Reserve. Federal Reserve Board Votes to Affirm the Countercyclical Capital Buffer It is a tool in reserve, not an active constraint, though banks have to be ready if a credit boom prompts the Fed to turn it on.
G-SIB Surcharge
The largest, most interconnected banks carry an extra surcharge for being designated global systemically important bank holding companies. Each G-SIB calculates the surcharge under two methods and applies whichever is higher. Method 1 surcharges range from 1.0% to 3.5% in the standard buckets and can climb to 4.5% or higher for the most systemically important firms. Method 2, which factors in reliance on short-term wholesale funding, can reach 5.5% or more.6eCFR. 12 CFR 217.403 – GSIB Surcharge Combined with the conservation buffer, real CET1 targets for the biggest U.S. banks often sit at 10% or more.
Stress Capital Buffer
For large banks, the Fed replaces the static 2.5% conservation buffer with a tailored stress capital buffer (SCB) set each year. The SCB equals the projected decline in a bank’s CET1 ratio under the Fed’s severely adverse scenario plus planned common stock dividends over the stress period, with a 2.5% floor. Banks with riskier portfolios or more aggressive payout plans get a higher SCB.7eCFR. 12 CFR 238.170 – Capital Planning and Stress Capital Buffer Requirement
The Leverage Ratio Backstop
Risk weighting has an obvious weakness: if a bank’s models understate risk, the ratios look healthier than they should. The supplementary leverage ratio (SLR) ignores risk weights entirely, dividing Tier 1 capital by total leverage exposure, which includes on-balance-sheet assets plus off-balance-sheet items such as credit derivatives and securities lending.8eCFR. 12 CFR Part 217 Subpart B – Capital Ratio Requirements and Buffers
Banks subject to the Federal Reserve’s prudential standards must maintain an SLR of at least 3%.9Office of Financial Research. Banks’ Supplementary Leverage Ratio The eight U.S. G-SIBs face a stricter enhanced SLR. At the holding company level, G-SIBs must maintain more than 5%, reflecting the 3% minimum plus a 2% buffer that was recalibrated in April 2026 to equal 50% of the firm’s G-SIB method 1 surcharge. Their insured depository institution subsidiaries need an SLR of at least 6% to qualify as well capitalized.10Federal Reserve. Rule Proposed to Tailor Enhanced Supplementary Leverage Ratio
A Simpler Path for Community Banks
Smaller institutions can opt into the Community Bank Leverage Ratio (CBLR), which skips the risk-weighted math entirely. To qualify, a bank must have less than $10 billion in total consolidated assets and meet risk-profile criteria covering off-balance-sheet exposures, trading activity, and derivatives.
Effective July 1, 2026, a qualifying bank that maintains a leverage ratio of at least 8% (reduced from the prior 9% threshold) is automatically considered well capitalized under the prompt corrective action framework, with no need to calculate separate risk-based ratios.11Office of the Comptroller of the Currency. Regulatory Capital Rule – Revisions to the Community Bank Leverage Ratio Framework A CBLR bank that slips below 8% but stays above 7% gets a four-quarter grace period to return to compliance; falling to 7% or below sends the bank back to the full risk-based framework. Banks can use up to eight grace-period quarters within any rolling five-year window.12Office of the Comptroller of the Currency. Community Bank Leverage Ratio – Final Rule
What Happens If a Bank Falls Short
Federal law sorts banks into five capital categories, and the consequences escalate sharply as an institution moves down the ladder.13eCFR. 12 CFR Part 6 – Prompt Corrective Action14Office of the Law Revision Counsel. 12 USC 1831o – Prompt Corrective Action
- Well capitalized: CET1 at or above 6.5%, Tier 1 at or above 8%, total capital at or above 10%, and leverage ratio at or above 5%. No supervisory restrictions.
- Adequately capitalized: meets the minimums but falls short of the well-capitalized thresholds. The bank cannot accept brokered deposits without a waiver.
- Undercapitalized: below any minimum. The bank cannot pay dividends or management fees if doing so would push it further below, asset growth is frozen unless the regulator approves a capital restoration plan, and prior approval is needed for acquisitions or new branches.
- Significantly undercapitalized: substantially below the minimums. Regulators can force recapitalization, restrict affiliate transactions, and replace senior management.
- Critically undercapitalized: tangible equity falls to a critically low level. The FDIC must appoint a receiver or conservator within 90 days unless another action would better protect the deposit insurance fund.
The line between “adequately capitalized” and “well capitalized” is where most banks feel the pressure day to day. Falling out of well-capitalized status, even without violating a minimum, limits access to certain deposits and signals trouble to counterparties. For severe violations, civil money penalties can reach $1 million per day.15Office of the Law Revision Counsel. 12 USC 505 – Civil Money Penalty
How Compliance Is Measured
Every bank files a Consolidated Report of Condition and Income, known as the Call Report, with regulators each quarter. It is due no later than 30 days after quarter-end, with an additional five calendar days for institutions with more than one foreign office.16Federal Deposit Insurance Corporation. Consolidated Reports of Condition and Income Regulators use the data to spot trends, flag institutions moving toward trouble, and calibrate supervisory responses. Inaccurate Call Report data can draw enforcement action on top of whatever capital issue the inaccuracy was masking.
Large banks also go through annual stress testing. The Fed applies a hypothetical disaster scenario to each bank’s actual portfolio and projects how capital would hold up over a nine-quarter horizon. The 2026 severely adverse scenario assumes unemployment rising from 4.5% to a peak of 10%, equity prices falling roughly 54%, nominal house prices dropping 29%, commercial real estate values declining 40%, and real GDP contracting by 4.8%.17Federal Reserve. Proposed 2026 Stress Test Scenarios The numbers are deliberately extreme, and the results feed directly into each bank’s stress capital buffer. Poor performance under stress produces a higher SCB, which forces the bank to hold more capital in normal times against the next downturn.