Tier 1 Capital Ratio

AAA

DEFINITION of 'Tier 1 Capital Ratio'

A 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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Investment Bank - IB

    A financial intermediary that performs a variety of services. ...
  2. Total Asset-To-Capital Ratio - ...

    A leverage covenant placed on Canadian Institutions regulated ...
  3. Tier 1 Common Capital Ratio

    A measurement of a bank's core equity capital compared with its ...
  4. Core Capital

    The minimum amount of capital that a thrift bank, such as a savings ...
  5. Bank

    A financial institution licensed as a receiver of deposits. There ...
  6. Central Bank

    The entity responsible for overseeing the monetary system for ...
Related Articles
  1. Using Economic Capital To Determine ...
    Personal Finance

    Using Economic Capital To Determine ...

  2. Is Your Bank On Its Way Down?
    Personal Finance

    Is Your Bank On Its Way Down?

  3. 12 Things You Need To Know About Financial ...
    Investing Basics

    12 Things You Need To Know About Financial ...

  4. Accounting Rules Could Roil The Markets
    Bonds & Fixed Income

    Accounting Rules Could Roil The Markets

comments powered by Disqus
Hot Definitions
  1. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  2. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  3. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  4. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  5. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  6. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
Trading Center