Common Equity Tier 1 (CET1): Ratio, Deductions, and Buffers

Common Equity Tier 1 capital, usually shortened to CET1, is the highest-quality capital a bank holds: common shares, retained earnings, and accumulated other comprehensive income, minus a short list of regulatory deductions. Under the Basel III framework, every bank must keep at least 4.5% of its risk-weighted assets in CET1. That floor is only the starting line. Mandatory buffers, a surcharge for the largest global banks, and firm-specific results from annual stress tests push the real minimum well above 4.5% for most institutions.

CET1 matters more than any other capital measure because it is the only layer that absorbs losses while the bank is still operating and before any creditor takes a hit. Additional Tier 1 instruments and Tier 2 subordinated debt sit above CET1 in the capital stack and carry their own minimums (6% for total Tier 1, 8% for total capital), but regulators treat CET1 as the truest measure of financial strength because it cannot be met with borrowed money.¹

What Counts as CET1 Capital

Three line items do nearly all the work.

Common shares and stock surplus. These are the ordinary shares the bank has issued plus the amount investors paid above par value. They have no maturity, no mandatory redemption, and no fixed payments. Shareholders are last in line in a liquidation, so their investment is fully available to cover losses.

Retained earnings. Cumulative profits the bank has kept rather than distributed as dividends. For most banks this is the largest component of CET1. Retained earnings are already on the balance sheet, so they do not depend on investors being willing to buy new shares during a downturn.

Accumulated other comprehensive income (AOCI). Unrealized gains and losses on holdings like available-for-sale securities and certain hedges flow through AOCI. When bond prices fall, AOCI shrinks and pulls CET1 down with it.¹

What Gets Deducted

Not everything on the equity side of the balance sheet qualifies. Regulators strip out items that look like capital in good times but would not pay a depositor in a crisis.

Goodwill is the largest deduction at most banks. When a bank buys another company for more than the target’s net asset value, the premium becomes goodwill. It cannot be sold for cash, so it is removed in full from CET1. Other intangible assets, including trademarks and proprietary software, come out the same way.²

Deferred tax assets that depend on future profitability are limited because a bank losing money cannot use the benefit. Mortgage servicing assets and significant investments in the common stock of other financial institutions face similar threshold-based treatment. Each of these three items can count toward CET1 only up to 10% of CET1 individually, and the three combined cannot exceed 15% of CET1. Amounts above those thresholds are deducted dollar for dollar. Amounts below the thresholds stay in capital but receive a 250% risk weight in the denominator of the ratio, which penalizes heavy concentrations without eliminating them.³

How the CET1 Ratio Is Calculated

The CET1 ratio is adjusted CET1 capital divided by total risk-weighted assets (RWA). A simple leverage ratio treats every dollar of assets alike, but the RWA approach assigns weights based on credit risk, so a bank holding mostly Treasuries needs far less capital than one loaded with unsecured commercial loans.

Each asset is multiplied by a risk-weight percentage, and the results sum to total RWA. Under the Basel standardized approach:

Cash and claims on sovereigns rated AAA to AA- (including U.S. Treasuries) carry a 0% risk weight and add nothing to RWA.
Residential mortgages run from 20% to 70% depending on loan-to-value, with 50% applying to LTVs between 90% and 100%.
Unrated corporate loans carry a 100% weight, so every dollar counts fully.
Commercial real estate runs from 70% to 110%, depending on LTV and whether the property’s cash flow services the debt.⁴

A bank that shifts toward speculative lending sees its RWA climb and its ratio fall even if actual equity has not changed. Most U.S. banks use this standardized approach. The largest and most complex firms (generally Category I and II) are also subject to an expanded risk-based approach that includes a separate operational risk charge calibrated to income and expenses.⁵ A revised proposal to finalize parts of the framework (the Basel III Endgame) was released in March 2026 and remained in public comment as of mid-2026, so the current schedules still apply.

The Minimum Isn’t Really 4.5%

The 4.5% minimum is the floor. Buffers and surcharges stack on top of it.

Capital Conservation Buffer

Under Basel III, banks hold a 2.5% capital conservation buffer above the minimum, bringing the effective floor to 7.0%. In the United States, banks under $100 billion in total assets use that fixed 2.5% buffer. Larger banks subject to the Federal Reserve’s capital plan rule instead use a firm-specific stress capital buffer (SCB), which replaced the static 2.5% buffer for those firms.⁶

Stress Capital Buffer

The SCB is calibrated from the Federal Reserve’s annual supervisory stress test and has a floor of 2.5%. Many large banks carry an SCB well above that floor because the stress test projects how far CET1 would fall under a hypothetical severe recession.⁷

G-SIB Surcharge

Global systemically important banks pay an additional CET1 surcharge based on size, interconnectedness, cross-border activity, and complexity. The buckets:

Bucket 1: 1.0%
Bucket 2: 1.5%
Bucket 3: 2.0%
Bucket 4: 2.5%
Bucket 5: 3.5%

As of the 2025 assessment, no bank occupies Bucket 5. JPMorgan Chase sits in Bucket 4 with a 2.5% surcharge, the heaviest in the world.⁸ For a bank in that position, the minimum CET1 is 4.5% plus the SCB (at least 2.5%) plus the 2.5% surcharge, totaling at least 9.5% before any other adjustments.⁹

Countercyclical Capital Buffer

Basel III also lets national regulators activate a countercyclical buffer of up to 2.5% during periods of excessive credit growth. The Federal Reserve has kept this buffer at 0% since adoption. It has not been triggered in the United States.

How Stress Tests Set Large-Bank Requirements

For large U.S. banks, the Dodd-Frank Act stress test is the mechanism that produces firm-specific capital requirements. The Federal Reserve designs a hypothetical severely adverse scenario (typically a deep recession, a spike in unemployment, and a sharp decline in asset prices) and projects how each bank’s CET1 ratio would fare over a nine-quarter horizon.

The projected peak-to-trough decline in CET1 plus four quarters of planned dividends becomes the bank’s SCB. If the test projects a 4-percentage-point drop, the SCB is set at 4%, well above the 2.5% floor. Banks with riskier portfolios or thinner margins automatically face higher requirements without regulators prescribing asset-specific rules.¹⁰ In April 2025, the Federal Reserve proposed averaging stress test results over two consecutive years to reduce year-to-year volatility in requirements.⁷

What Happens If a Bank Falls Short

Dipping Into the Buffer

A bank that stays above 4.5% but eats into its buffer does not close. It loses the ability to distribute capital freely. The restrictions scale with how far the buffer has eroded:

Buffer above 2.5%: no restrictions.
Buffer between 1.875% and 2.5%: distributions capped at 60% of eligible retained income.
Buffer between 1.25% and 1.875%: capped at 40%.
Buffer between 0.625% and 1.25%: capped at 20%.
Buffer at or below 0.625%: no distributions permitted.

These automatic restrictions push banks to rebuild capital rather than pay dividends while their cushion thins.¹¹

Falling Below the Minimum

When CET1 drops below 4.5%, consequences escalate under the Prompt Corrective Action (PCA) framework:

Well capitalized (CET1 at or above 6.5%): no supervisory constraints.
Adequately capitalized (CET1 at or above 4.5%): meets minimums but may face limits on certain activities.
Undercapitalized (CET1 below 4.5%): the bank must submit a capital restoration plan within 45 days and accept restrictions on asset growth, expansion, dividends, and management fees.

Below “undercapitalized,” the “significantly undercapitalized” and “critically undercapitalized” categories bring progressively harsher interventions, up to mandatory receivership. PCA is deliberately mechanical. Regulators are required to act at each threshold, which prevents delay through optimistic assumptions.¹²

Where to Find a Bank’s CET1

Capital ratios are not confidential. The Basel III Pillar 3 framework requires public disclosure of capital composition, risk-weighted assets, and key prudential metrics so investors, counterparties, and analysts can run their own numbers.¹³

In the United States, banks file quarterly Call Reports with the FFIEC, and CET1 capital and ratios appear on Schedule RC-R. The filings are public, with roughly a quarter’s lag.¹⁴ The Federal Reserve also publishes the total CET1 requirement for each large bank annually, broken down by component, so the market can see how much cushion each institution carries above its personalized minimum.⁹

1
Bank for International Settlements. Definition of Capital in Basel III – Executive Summary
2
Bank for International Settlements. Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems
3
Office of the Comptroller of the Currency. New Capital Rule Quick Reference Guide for Community Banks
4
Bank for International Settlements. Basel Framework – Standardised Approach: Individual Exposures
5
Federal Register. Regulatory Capital Rules: Regulatory Capital and Standardized Approach for Risk-Weighted Assets
6
Federal Reserve Board. Amendments to the Regulatory Capital, Capital Plan, and Stress Test Rules
7
Federal Register. Modifications to the Capital Plan Rule and Stress Capital Buffer Requirement
8
Bank for International Settlements. G-SIB Framework: Cut-Off Score and Bucket Thresholds
9
Federal Reserve Board. Annual Large Bank Capital Requirements
10
Federal Reserve. Dodd-Frank Act Stress Test 2025: Supervisory Stress Test Results
11
FDIC. Regulatory Capital Rules
12
eCFR. 12 CFR Part 324 Subpart H – Prompt Corrective Action
13
Bank for International Settlements. Pillar 3 Disclosure Requirements – Updated Framework
14
FFIEC. Consolidated Reports of Condition and Income for a Bank with Domestic Offices Only (FFIEC 041)