Definition
Tier 1 Capital
Tier 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.
Under Basel III, Tier 1 has two parts: Common Equity Tier 1 (CET1), comprising paid-up equity and retained earnings, and Additional Tier 1, which includes perpetual AT1 bonds. Tier 1 is higher quality than Tier 2 because it absorbs losses without the bank having to fail.
The RBI sets minimum Tier 1 and CET1 ratios within the overall CRAR requirement. Strong Tier 1 gives a bank the cushion to grow advances and withstand stress, which is why fresh equity raises directly lift a bank's Tier 1 strength.
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.
- Tier 2 CapitalTier 2 capital is a bank's supplementary, gone-concern capital, including subordinated debt and certain reserves, that absorbs losses only if the bank is wound up.
- 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.
- AT1 Bonds (Additional Tier 1)AT1 bonds are perpetual, loss-absorbing instruments that count as Additional Tier 1 capital for banks and can be written down or have coupons skipped under stress.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.