Definition
Common Equity Tier 1 (CET1)
Common Equity Tier 1 is the highest-quality bank capital, consisting of paid-up equity shares, share premium and retained earnings, net of regulatory deductions.
CET1 is the purest loss-absorbing capital because it has no fixed repayment and no coupon obligation. Under Basel III, banks must hold a minimum CET1 ratio plus a capital conservation buffer, breaching which restricts dividend payouts.
For Indian banks, the CET1 ratio is the cleanest gauge of capital strength, stripping out hybrid instruments like AT1 bonds. Investors prefer banks with comfortable CET1 because they can fund loan growth and pay dividends without needing dilutive equity raises.
Related terms
- Capital Adequacy Ratio (CAR / CRAR)The Capital Adequacy Ratio, also called CRAR, is the ratio of a bank's capital to its risk-weighted assets, measuring its ability to absorb losses.
- Risk-Weighted Assets (RWA)Risk-Weighted Assets are a bank's assets weighted according to their credit risk, used as the denominator in capital adequacy calculations.
- Tier 1 CapitalTier 1 capital is a bank's core, going-concern capital, made up mainly of equity and reserves plus eligible additional Tier 1 instruments, that absorbs losses while the bank operates.
- Basel III NormsBasel III is the global bank regulation framework, adopted by the RBI, that strengthens capital quality, adds liquidity and leverage standards, and introduces capital buffers.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.