Tier 1 Capital Ratio

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What is the 'Tier 1 Capital Ratio'

The Tier 1 capital ratio is the comparison between a banking firm's core equity capital and total risk-weighted assets. A firm's core equity capital is known as its Tier 1 capital and is the measure of a bank's financial strength based on the sum of its equity capital and disclosed reserves, and sometimes non-redeemable, non-cumulative preferred stock. A firm's risk-weighted assets include all assets that the firm holds that are systematically weighted for credit risk. Central banks typically develop the weighting scale for different asset classes, such as cash and coins, which have zero risk, versus a letter or credit, which carries more risk.

BREAKING DOWN 'Tier 1 Capital Ratio'

Regulators use the Tier 1 capital ratio to grade a firm's capital adequacy as one of the following rankings: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. A firm must have a Tier 1 capital ratio of 6% or greater, and not pay any dividends or distributions that would affect its capital, to be classified as well-capitalized. Firms that are ranked undercapitalized or below are prohibited from paying any dividends or management fees. In addition, they are required to file a capital restoration plan.

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RELATED FAQS
  1. How can I calculate the tier 1 capital ratio?

    Learn about the tier 1 capital ratio, what the ratio indicates about a firm's capital adequacy and how to calculate a firm's ... Read Answer >>
  2. What are some of the well-known no-load funds?

    Find out more about the capital to risk-weighted assets ratio, what the ratio measures and the formula used to calculate ... Read Answer >>
  3. What is the difference between tier 1 capital and tier 2 capital?

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  4. How do I calculate the capital to risk weight assets ratio for a bank in Excel?

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  5. How can I calculate the leverage ratio using tier 1 capital?

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  6. What does it mean when a company has a high capital adequacy ratio?

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