Question

Define the term “Common Equity Tier 1 Capital”.(1.Definition 2.The Composition Common Equity Tier 1 Capital 3.What is the use of Common Equity Tier 1 Capital)

Answer 1

1.) Definition :- CET1 is a measure of bank solvency that gauges a bank’s capital strength. This measure is better captured by the CET1 ratio, which measures a bank’s capital against its assets. Because not all assets have the same risk, the assets acquired by a bank are weighted based on the credit risk and market risk that each asset presents.

2.) Composition :- Common equity Tier 1 comprises a bank’s core capital and includes common shares, stock surpluses resulting from the issue of common shares, retained earnings, common shares issued by subsidiaries and held by third parties, and accumulated other comprehensive income (AOCI).

3.) Use of CET 1 :- It is a key measure of a bank's financial strength that has been adopted as part of the Basel III Accord on bank regulation.

The tier 1 capital ratio is the basis for the Basel III international capital and liquidity standards devised.