Tier 1 capital, under the Basel Accord, measures a bank's core capital. The tier 1 capital ratio measures a bank's financial health, its core capital relative and its total riskweighted assets. In 2015, under Basel III, the minimum tier 1 capital ratio is 6%.
Calculate a bank's tier 1 capital ratio by dividing its tier 1 capital by its total riskweighted assets. Tier 1 capital includes a bank's shareholders' equity and retained earnings. Riskweighted assets are a bank's assets weighted according to their risk exposure. Regulators use this ratio to determine whether a bank is well capitalized, undercapitalized or adequately capitalized relative to the minimum requirement.
For example, bank ABC has shareholders' equity of $3 million and retained earnings of $2 million, so its tier 1 capital is $5 million. Bank ABC has riskweighted assets of $50 million. Consequently, its tier 1 capital ratio is 10% ($5 million/$50 million), and it is considered to be wellcapitalized compared to the minimum requirement.
On the other hand, bank DEF has retained earnings of $600,000 and stockholders' equity of $400,000. Thus, its tier 1 capital is $1 million. Bank DEF has riskweighted assets of $25 million. Therefore, bank DEF's tier 1 capital ratio is 4% ($1 million/$25 million), which is undercapitalized because it is below the minimum tier 1 capital ratio under Basel III.
Bank GHI has tier 1 capital of $5 million and riskweighted assets of $83.33 million. Consequently, bank GHI's tier 1 capital ratio is 6% ($5 million/$83.33 million), which is considered to be adequately capitalized because it is equal to the minimum tier 1 capital ratio.

Calculate the Leverage Ratio Using Tier 1 Capital
Knowing about the tier 1 leverage ration, how to calculate it and what it indicates about a bank is important for determining ... Read Answer >> 
What is the difference between the capital adequacy ratio vs. the solvency ratio?
Understand the different applications for using the capital adequacy ratio and the solvency ratio, which are both equity ... Read Answer >> 
Why is the capital adequacy ratio important to shareholders?
Understand what the capital adequacy ratio is and why it is a very important metric of financial soundness for evaluating ... Read Answer >> 
How do leverage ratios help to regulate how much banks lend or invest?
Learn what leverage ratios mean for banks, how regulators restrict leverage, and what impact ratios have on a bank's ability ... Read Answer >> 
How can a company raise its asset turnover ratio?
Find out more about the asset turnover ratio, what it measures, how to calculate the ratio and how a company could increase ... Read Answer >>

Personal Finance
Is Your Bank On Its Way Down?
Find out how the Tier 1 capital ratio can be used to tell if your bank is going under. 
Personal Finance
How Basel 1 Affected Banks
The 1988 Basel 1 agreement sought to decrease bankruptcies among major international banks. 
Investing
Useful metrics for evaluating bank stocks
Learn which metrics are most useful to evaluate companies in the banking sector and the issues when comparing them across the various banks. 
Personal Finance
The Dirty Secret About Your Credit Score
The tier system of credit scores leaves borrowers with little wiggle room. 
Retirement
The Tax Implications of Inheriting Assets
Whether you are passing on assets or inheriting them, it's crucial to be aware of the tax consequences. 
Investing
The Biggest Risks of Investing in Bank of America Stock
Learn the largest risks to owning Bank of America stock. Discover its outlook through fundamental analysis and external risks to the company and its industry. 
Investing
Financial Ratios to Analyze Investment Banks
The general rules of stockpicking apply but there are also some additional metrics with particular relevance for investment banks. 
Investing
Basel II Accord To Guard Against Financial Shocks
Problems with the original accord became evident during the subprime crisis in 2007.

Tier 1 Common Capital Ratio
The Tier 1 common capital ratio is a measurement of a bank's ... 
Tier 1 Capital Ratio
The tier 1 capital ratio is the ratio of a bank’s core tier 1 ... 
Tier 1 Capital
Tier 1 capital is a term used to describe the capital adequacy ... 
Basel III
Basel III is a comprehensive set of reform measures designed ... 
Basel II
Basel II is a set of banking regulations put forth by the Basel ... 
TieredRate Account
A tieredrate account is a checking or savings account that pays ...