What is the difference between CET1, Tier 1, and Total Capital ratios?

These three ratios measure a bank's capital strength using the same basic formula but with different definitions of what counts as capital. CET1 is the strictest, counting only the highest-quality capital like common stock and retained earnings. Tier 1 adds preferred stock, and Total Capital adds subordinated debt and loan loss reserves.

All three ratios divide some measure of capital by risk-weighted assets (RWA). The difference is entirely in the numerator: each ratio uses a progressively broader definition of what qualifies as "capital." The structure works like three concentric circles, with CET1 at the narrowest core and each successive tier adding lower-quality instruments around it.

What Each Tier Includes

CET1 (Common Equity Tier 1) is the innermost circle and the purest form of bank capital:

Common stock and surplus

Retained earnings

Accumulated other comprehensive income (AOCI)

Certain qualifying minority interests

This is permanent capital with no maturity date, no required payments, and no obligation to be repaid. It absorbs losses immediately and continuously as they occur.

Tier 1 capital equals CET1 plus Additional Tier 1 (AT1) capital. AT1 includes non-cumulative perpetual preferred stock and certain hybrid instruments that can absorb losses while the bank is still operating. These instruments rank below common equity but above all debt, and they're designed to take losses at the point of non-viability, before the bank enters resolution.

Total Capital adds Tier 2 capital on top of Tier 1. Tier 2 includes:

Subordinated debt with an original maturity of at least five years

Certain loan loss reserves (up to 1.25% of risk-weighted assets)

Other instruments that only absorb losses if the bank fails and enters liquidation

Tier 2 is sometimes called "gone-concern" capital because it primarily protects depositors and senior creditors after the bank has already failed, not while it's still operating.

Minimum Requirements and Buffers

Regulators set different minimum ratios for each tier, reflecting their loss-absorbing quality:

CET1 ratio: 4.5% minimum

Tier 1 ratio: 6.0% minimum

Total Capital ratio: 8.0% minimum

These are absolute floors. On top of the CET1 minimum, banks must maintain a 2.5% capital conservation buffer, bringing the effective CET1 threshold to 7.0% before distribution restrictions apply. The largest banks face additional surcharges (the G-SIB surcharge) that can add another 1.0% to 3.5% to their CET1 requirement.

To be classified as "well capitalized" under the Prompt Corrective Action (PCA) framework, a bank needs 6.5% CET1, 8.0% Tier 1, and 10.0% Total Capital. The vast majority of U.S. banks operate well above these levels.

Why CET1 Gets the Most Attention

Of the three ratios, CET1 receives by far the most scrutiny from regulators, analysts, and investors.

The capital conservation buffer and G-SIB surcharges are measured against CET1 specifically, not Tier 1 or Total Capital. When a bank's CET1 ratio dips into the buffer zone (between 4.5% and 7.0%), automatic restrictions kick in on dividends, share buybacks, and discretionary bonus payments. The lower the ratio falls within that range, the more severe the restrictions become. This makes CET1 the binding constraint for capital return decisions at most banks.

CET1 also represents the capital that genuinely belongs to common shareholders. Preferred stock (counted in Tier 1) and subordinated debt (counted in Total Capital) have claims that rank ahead of common equity in a liquidation. From an equity investor's perspective, CET1 is the relevant number for estimating excess capital, buyback capacity, and dividend sustainability.

What the Gaps Between Ratios Reveal

Looking at all three ratios together tells you something about a bank's capital structure that any single ratio misses.

A typical well-capitalized U.S. bank might report a CET1 ratio of 11%, a Tier 1 ratio of 12%, and a Total Capital ratio of 14%. The 1-percentage-point gap between CET1 and Tier 1 represents Additional Tier 1 capital (mostly preferred stock). The 2-percentage-point gap between Tier 1 and Total Capital represents Tier 2 capital (mostly subordinated debt and allowances).

Narrow gaps suggest the bank relies almost entirely on common equity, which is generally a sign of high capital quality. Wider gaps might indicate substantial preferred stock or subordinated debt issuance. Neither pattern is inherently good or bad, but the composition adds context that a single ratio can't provide.

Community banks typically show very narrow gaps because they rarely issue preferred stock or subordinated debt. Their CET1, Tier 1, and Total Capital ratios tend to cluster within a percentage point or two of each other. Large banks with complex capital structures usually show wider separation across the three ratios.

A Common Misconception

A bank reporting a 14% Total Capital ratio isn't necessarily better capitalized than one with 12%. The composition matters. If most of that 14% consists of Tier 2 subordinated debt rather than CET1 common equity, the bank may actually have less capacity to absorb losses on a going-concern basis. Comparing banks on capital strength means looking at CET1 ratios first, then examining the full capital stack for additional context.

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Excess Capital Return Model