How do I calculate the Tier 1 capital ratio?

The Tier 1 capital ratio equals Tier 1 capital divided by risk-weighted assets. Tier 1 capital combines Common Equity Tier 1 (CET1) with Additional Tier 1 (AT1) instruments like perpetual preferred stock. Banks report this ratio directly, so investors generally use the reported figure rather than building it from scratch.

The formula is:

Tier 1 Capital Ratio = Tier 1 Capital / Risk-Weighted Assets

Where: Tier 1 Capital = CET1 Capital + Additional Tier 1 (AT1) Capital

The denominator uses the same risk-weighted assets figure that appears in the CET1 ratio and Total Capital ratio calculations. What distinguishes the Tier 1 ratio from CET1 is the numerator: it includes Additional Tier 1 capital on top of common equity.

What Qualifies as Additional Tier 1 Capital

AT1 capital consists of instruments designed to absorb losses while the bank is still operating (called going-concern loss absorption). The most common AT1 instruments are:

Non-cumulative perpetual preferred stock, which has no maturity date and pays dividends only at the issuer's discretion

Contingent convertible bonds (CoCos), which convert into common equity or get written down if the bank's capital falls below a specified trigger level

Other qualifying hybrid instruments that meet regulatory requirements for permanence, subordination, and payment flexibility

To count as AT1, an instrument must be subordinated to depositors and general creditors, have no fixed maturity, and be callable only at the issuer's option after a minimum five-year period. The bank cannot create any expectation that it will call the instrument at the earliest opportunity, because AT1 is meant to function as permanent capital.

Dividends or coupons on AT1 instruments must be fully discretionary and non-cumulative. If the bank skips a preferred dividend payment, it doesn't owe that amount later. This separates AT1 from ordinary debt: the bank can stop making payments without triggering a default.

Walking Through the Calculation

The steps to build from CET1 to the Tier 1 ratio:

1. Start with CET1 capital (common shareholders' equity after regulatory adjustments, including deductions for goodwill, intangible assets, and certain deferred tax assets).

2. Add qualifying AT1 instruments at their par or stated value.

3. Apply any regulatory deductions specific to AT1. These are generally small for most banks and may include investments in AT1 instruments issued by other financial institutions above certain thresholds.

4. The result is Tier 1 capital.

5. Divide by risk-weighted assets (the same RWA figure used for the CET1 ratio).

Worked Example

A regional bank reports CET1 capital of $4.2 billion and has issued $500 million in perpetual non-cumulative preferred stock that qualifies as AT1 capital. Risk-weighted assets total $35 billion.

Tier 1 capital = $4.2B + $0.5B = $4.7 billion Tier 1 ratio = $4.7B / $35B = 13.4%

This bank's CET1 ratio is $4.2B / $35B = 12.0%. The 140 basis point gap (13.4% minus 12.0%) reflects the preferred stock sitting in the AT1 layer.

The Gap Between CET1 and Tier 1

The size of this gap varies dramatically by bank size. Most community banks and many smaller regionals have never issued preferred stock or hybrid AT1 instruments, so their CET1 and Tier 1 ratios are identical. The gap simply doesn't exist for them.

At larger banks, the picture changes. A bank reporting CET1 of 11.5% and Tier 1 of 13.0% has AT1 capital equal to about 1.5% of its risk-weighted assets. That gap tells you the bank has tapped the preferred stock or hybrid capital market to supplement its common equity base.

From a common shareholder's perspective, CET1 generally matters more than Tier 1. CET1 absorbs losses first and carries the most stringent regulatory minimums. AT1 adds a cushion, but it sits behind the common equity layer that directly protects your ownership stake.

Why Banks Issue AT1 Instruments

If CET1 is higher-quality capital, why would a bank issue preferred stock instead of simply retaining more earnings or selling common shares?

Cost and dilution. Preferred stock raises capital without diluting existing common shareholders' ownership or earnings per share. The cost of preferred dividends is frequently lower than the implied return common equity holders demand, making AT1 a less expensive way to build the Tier 1 ratio. For large banks facing surcharges and stress capital buffers that push requirements above 10%, AT1 offers a path to compliance without concentrating all additional capital in the more costly CET1 layer.

There are limits to this strategy. Regulators cap how much AT1 can count relative to CET1. AT1 instruments also create fixed-cost obligations (preferred dividends) that become a burden during periods of stress, precisely when capital matters most.

Regulatory Minimums

The minimum Tier 1 capital ratio is 6.0% for adequately capitalized status and 8.0% for well-capitalized status.

In practice, the CET1 requirement is almost always the binding constraint rather than the Tier 1 floor. The arithmetic is clear: banks need CET1 of at least 4.5% plus a 2.5% capital conservation buffer, totaling 7.0%. Any bank meeting 7.0% CET1 that has even a small amount of AT1 capital will already exceed the 6.0% Tier 1 minimum. For banks with additional surcharges or stress capital buffers, the CET1 requirement climbs further above the Tier 1 threshold.

Most U.S. banks carry Tier 1 ratios between 11% and 14%, well above the minimums.

Common Mistakes

Treating CET1 and Tier 1 as interchangeable when comparing banks is a frequent error. A bank showing 12% CET1 and 12% Tier 1 has a fundamentally different capital composition from one reporting 10% CET1 and 13% Tier 1. The second bank relies more heavily on preferred stock, which creates pressure during downturns when preferred dividends still need to be covered out of earnings.

Another overlooked detail is the Community Bank Leverage Ratio (CBLR) framework. Banks that opt into CBLR (those under $10 billion in assets meeting specific criteria) use a single 9% leverage ratio threshold and are exempt from reporting risk-based capital ratios entirely. For CBLR banks, the Tier 1 capital ratio isn't separately calculated or disclosed.

Where to Find Reported Tier 1 Data

Banks report the Tier 1 ratio alongside their other capital ratios in several places:

Quarterly earnings releases and press releases

Investor presentations and supplemental financial data packages

Regulatory filings (Call Reports for banks, FR Y-9C for bank holding companies) available through the FFIEC and Federal Reserve

The capital reconciliation tables published by larger banks are especially useful. They trace how each capital component (common equity, retained earnings, regulatory deductions, preferred stock) builds from CET1 to Tier 1 to Total Capital, making the relationship between the three tiers concrete and easy to follow.

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