CET1, or Common Equity Tier 1 capital, represents the highest quality of regulatory capital for financial institutions. It acts as the primary buffer against losses.
Understanding Common Equity Tier 1 (CET1)
CET1 capital is crucial for maintaining the solvency and stability of banks and other financial institutions. It comprises the most reliable and readily available resources to absorb losses. Here's a breakdown:
- Highest Quality Capital: CET1 assets are considered the gold standard of regulatory capital.
- Loss Absorption: They are designed to immediately absorb losses as they occur, protecting depositors and the financial system. According to our reference, this immediate loss absorption is a defining characteristic of CET1.
- Going-Concern Basis: While Additional Tier 1 (AT1) capital also provides loss absorption, CET1 capital has stricter criteria and offers a more robust safety net. AT1 instruments do not meet all the requirements for CET1.
CET1 Components
CET1 typically includes:
- Common Stock: Shares issued by the bank.
- Retained Earnings: Profits that have not been distributed as dividends.
- Other Comprehensive Income: Gains and losses that bypass the income statement.
Importance of CET1
Maintaining adequate CET1 levels is vital for:
- Regulatory Compliance: Banks must meet minimum CET1 ratios set by regulatory bodies.
- Investor Confidence: Strong CET1 levels signal financial health and attract investors.
- Financial Stability: CET1 helps banks withstand economic shocks and continue lending.
