Tier 1 capital is a bank’s core financial strength. It represents the money that belongs to the bank’s owners and has no obligation to be paid back to anyone else.
This capital is mainly made up of:
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Money invested by shareholders
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Profits the bank has kept instead of paying out
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Certain types of long-term preferred stock
Because this money is permanent and stable, it’s the first line of defense when a bank faces losses.
Why Tier 1 Capital Is So Important
Banks lend money, invest, and provide financial services every day. But sometimes loans go bad or markets decline.
Tier 1 capital allows a bank to:
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Cover unexpected losses
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Continue serving customers
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Avoid collapse during financial stress
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Protect depositors and the broader economy
Think of Tier 1 capital like a savings buffer for the bank itself — not for customers, but for survival.
A Simple Example
Imagine a bank has:
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$100 billion in loans and investments
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$6 billion in Tier 1 capital
If some borrowers stop repaying loans and the bank loses $3 billion, that loss comes out of Tier 1 capital — not customer deposits.
Without enough Tier 1 capital, the bank could fail much more quickly.
What Makes Up Tier 1 Capital?
Under modern banking rules, Tier 1 capital has two main parts:
1. Common Equity Tier 1 (CET1)
This is the highest-quality capital a bank has. It includes:
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Common stock
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Retained earnings (profits kept by the bank)
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Certain reserves and adjustments
CET1 is the strongest form of capital because it can absorb losses immediately.
2. Additional Tier 1 Capital (AT1)
This includes specific types of preferred stock and similar instruments that:
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Don’t have a set repayment date
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Can absorb losses under stress
AT1 is still strong, but not as reliable as CET1.
Important note:
All CET1 is Tier 1 capital, but not all Tier 1 capital is CET1.
How Regulators Measure Tier 1 Capital
Banks don’t just need Tier 1 capital — they need enough of it compared to their risk.
That’s where the Tier 1 capital ratio comes in.
This ratio compares:
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Tier 1 capital
to -
Risk-weighted assets (assets adjusted for how risky they are)
Riskier loans require more capital backing them.
Minimum Requirements Under Basel Rules
International banking standards known as the Basel Accords set minimum capital levels.
Under Basel III, banks must hold:
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At least 6% of risk-weighted assets in Tier 1 capital
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At least 4.5% specifically in CET1
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Total capital (Tier 1 + Tier 2) above 8%
These rules are designed to reduce bank failures and financial crises.
How Tier 1 Capital Differs From Tier 2 Capital
Tier 1 and Tier 2 capital serve different purposes:
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Tier 1 capital
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Used while the bank is still operating
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Absorbs losses early
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Considered “going concern” capital
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Tier 2 capital
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Used if a bank is failing
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Includes items harder to sell or use quickly
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Acts as a backup layer
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Tier 1 is stronger, more reliable, and more important for day-to-day stability.
What Changed After the 2008 Financial Crisis?
The financial crisis revealed that many banks:
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Didn’t have enough high-quality capital
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Took excessive risks
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Relied too much on complex financial products
In response, Basel III tightened capital rules, improved transparency, and clearly defined Tier 1 capital.
Later, Basel IV, which began taking effect in 2023, refined how risks are calculated and made capital requirements more precise — especially for large and complex banks.
Why Tier 1 Capital Matters to Everyday People
Even if you never invest in bank stocks, Tier 1 capital affects you because it:
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Helps protect your deposits
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Reduces the risk of bank failures
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Supports a stable financial system
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Lowers the chance of taxpayer-funded bailouts
Strong banks mean a stronger economy.
The Bottom Line
Tier 1 capital is the financial backbone of a bank. It consists mainly of shareholder equity and retained earnings, giving banks the ability to absorb losses and keep operating during tough times.
By requiring banks to hold enough Tier 1 capital, regulators aim to make the financial system safer — for banks, customers, and the economy as a whole.
For everyday Americans, Tier 1 capital is one of the quiet safeguards working behind the scenes to keep money secure.
