CET1, Tier 1 and Total Capital Ratios Explained

Updated 5 November 2026 · Standard formula, shown below

CET1, Tier 1 and total capital ratios show how much regulatory capital a bank holds against its risk-weighted assets, with each measure including a broader set of capital instruments. Investors use them to assess a bank’s loss-absorbing capacity and regulatory headroom, but the ratios are not guarantees of safety and should be read alongside asset quality, liquidity, earnings and the rules applicable to that bank.

What the three capital ratios measure

Bank capital is the financial cushion that can absorb losses before creditors or depositors bear them. The denominator in these ratios is risk-weighted assets (RWA), not simply the bank’s total assets. Regulators assign different weights to exposures according to their prescribed risk framework, so a bank’s RWA can be substantially different from its balance-sheet size.

CET1 ratio: Common Equity Tier 1 capital divided by RWA. CET1 is the highest-quality regulatory capital, primarily common shares and retained earnings, adjusted for regulatory deductions and filters.
Tier 1 ratio: Tier 1 capital divided by RWA. Tier 1 includes CET1 plus eligible Additional Tier 1 (AT1) instruments, such as certain perpetual instruments that meet regulatory conditions.
Total capital ratio: Total regulatory capital divided by RWA. Total capital includes Tier 1 plus eligible Tier 2 capital, which can include qualifying subordinated debt and other instruments subject to regulatory limits and adjustments.

These categories are nested: ordinarily, CET1 is no greater than Tier 1, and Tier 1 is no greater than total capital. The precise composition depends on applicable regulations and the bank’s disclosed figures.

How the ratios are calculated

The basic calculation for each measure is:

CET1 ratio = CET1 capital ÷ risk-weighted assets × 100
Tier 1 ratio = Tier 1 capital ÷ risk-weighted assets × 100
Total capital ratio = total regulatory capital ÷ risk-weighted assets × 100

For example, suppose a bank reports $60 billion of CET1 capital, $8 billion of eligible AT1 capital, $12 billion of eligible Tier 2 capital and $500 billion of RWA. Its CET1 ratio is 12% ($60 billion ÷ $500 billion); Tier 1 is 13.6% (($60 billion + $8 billion) ÷ $500 billion); and total capital is 16% (($60 billion + $8 billion + $12 billion) ÷ $500 billion). These simplified figures illustrate the arithmetic; actual regulatory calculations include detailed eligibility rules, deductions and adjustments.

A higher ratio can indicate a larger capital buffer relative to measured risk, but it does not necessarily mean a bank has more cash. Regulatory capital is not the same as cash or liquid assets, and RWA relies on rules and, in some cases, models that affect the denominator.

Why investors track them

Capital ratios help investors judge whether a bank has room to absorb losses, continue lending and meet regulatory requirements. They can also influence the scope for dividends, share buybacks and business expansion: constraints may apply when a bank falls close to required buffers, though the exact consequences depend on its jurisdiction and circumstances.

Useful comparisons include:

Capital headroom: Compare reported ratios with the bank’s applicable minimums and buffers, not just with a generic benchmark. Requirements vary by jurisdiction, institution and time.
Change over time: A falling ratio may reflect losses, distributions, higher RWA or changes in capital eligibility. A rising ratio might reflect retained earnings, new capital, lower RWA or a combination.
Capital quality: A larger CET1 share of total capital generally means more of the reported capital is common equity, rather than instruments with different loss-absorption features.
Peer context: Compare banks with similar business models, geographies and regulatory treatment. A lender with more trading, mortgage or corporate exposures may have a different RWA profile from a retail-focused bank.

Investors should also examine the bank’s own disclosures about its binding capital requirement, management targets and any relevant supervisory buffers. The headline ratio alone does not reveal how much capital is freely available for distributions.

Capital ratios versus leverage and liquidity

Capital ratios based on RWA are only one view of resilience. A bank can report a strong risk-based ratio while still having substantial leverage, because assets with low assigned risk weights can contribute relatively little to RWA. The leverage ratio provides a complementary, less risk-sensitive comparison of Tier 1 capital with a broader exposure measure. Its exact calculation and requirements depend on the relevant rules.

Liquidity measures answer a different question: whether a bank can meet near-term cash outflows and funding needs. A well-capitalized bank can still face liquidity pressure if it cannot access cash when needed. Conversely, liquid assets do not replace capital’s role in absorbing losses. Investors commonly review capital, leverage, liquidity, asset quality, funding and profitability together.

Common interpretation mistakes

Assuming total capital is all common equity: Tier 2 and AT1 instruments are not identical to common shares and may have different eligibility and loss-absorption terms.
Treating RWA as total assets: The denominators differ. A ratio cannot be interpreted correctly without knowing which exposure measure it uses.
Comparing percentages without checking rules: Regulatory definitions, buffers, deductions and reporting practices can differ across jurisdictions and institutions.
Reading a high number as a safety guarantee: Ratios are snapshots built from reported data and regulatory measures. They cannot predict every future loss, funding shock or change in conditions.
Ignoring the source of a change: A ratio can rise because RWA fell, even if capital did not increase. Review both numerator and denominator, as well as any explanation in the bank’s reporting.

For a more complete assessment, read the capital section of the bank’s latest regulatory filing or results announcement. Check the reporting date, whether figures are transitional or fully phased-in where relevant, and whether the bank reports consolidated or entity-level ratios. These details can make apparently similar numbers non-comparable.

Frequently Asked Questions

Is CET1 better than the total capital ratio?
CET1 measures the highest-quality regulatory capital, so it is especially useful for assessing a bank’s common-equity cushion. The total capital ratio captures a wider range of eligible capital. Neither replaces the other; investors often consider both.

Why is a bank’s CET1 ratio lower than its total capital ratio?
Total capital includes CET1 plus eligible AT1 and Tier 2 instruments. Those additional components make total capital at least as large as CET1 under the usual definitions, so the total ratio is typically higher.

What is a good CET1 ratio?
There is no single figure that is “good” for every bank. Compare the reported CET1 ratio with that bank’s applicable requirements, buffers, management target, peers and risk profile. Requirements and supervisory expectations vary.

Can a bank have a high capital ratio and still fail?
A high ratio is not a guarantee against failure. Losses can grow, funding can become difficult, liquidity can deteriorate, or reported risk measures may not capture future conditions. Capital ratios are one part of a broader assessment.

Does a higher capital ratio mean a bank has more cash?
No. Capital is a loss-absorbing regulatory measure, while cash and liquid assets concern the ability to make payments. A bank’s capital and liquidity positions should be assessed separately.

Putting the ratios in context

CET1, Tier 1 and total capital ratios are related measures of a bank’s capital cushion, ranked by the breadth of instruments included. For investors, their value lies less in a single headline percentage than in the details behind it: capital quality, RWA movements, regulatory headroom, peer comparisons and the bank’s broader financial condition. Treat the ratios as important evidence, not a standalone verdict.

Method: the standard formula for this calculation, rounded as each result states. See how the calculators work or report an error.