Common Equity Tier 1 (CET1)

What is Common Equity Tier 1 (CET1)

Common Equity Tier 1 (CET1) is a key measure of a bank’s financial strength. It represents the highest quality capital a bank can hold—money that is fully available to absorb losses and keep the bank stable during tough times.

CET1 includes things like:

• Common shares (the money investors put into the bank)
• Retained earnings (profits the bank has kept instead of paying out as dividends)

This capital is permanent, meaning it doesn’t have to be paid back. That makes it especially reliable when a bank faces financial stress.

Why CET1 matters

Banks face many risks—like customers not repaying loans, changes in the market, or unexpected economic downturns. CET1 acts as a safety cushion. If the bank loses money, CET1 is the first line of defense. It helps the bank stay open, protect depositors, and avoid needing help from the government.

Because of its importance, regulators like the Office of the Superintendent of Financial Institutions (OSFI) in Canada require banks to hold a minimum amount of CET1 capital. This is part of broader rules called capital adequacy requirements, which are based on international standards known as Basel III.

CET1 ratio

To measure how strong a bank is, regulators look at the CET1 ratio. This compares the bank’s CET1 capital to its risk-weighted assets (RWAs)—a way of measuring how risky the bank’s loans and investments are.

The formula is:

CET1 Ratio = CET1 Capital ÷ Risk-Weighted Assets

In Canada, the target CET1 ratio that OSFI sets is 11.5%, but most banks hold more than that to stay safe and meet additional buffer requirements.

In summary

CET1 is the core of a bank’s financial strength. It’s made up of the most reliable capital—like common shares and retained earnings—and is used to absorb losses when things go wrong. Regulators require banks to hold a certain amount of CET1 to make sure they can survive financial shocks and continue serving their customers. A strong CET1 position helps build trust in the banking system and keeps the economy stable.

In summary, CET1 is not just a regulatory metric—it is a vital safeguard for financial stability. It ensures that institutions have a solid capital foundation, enabling them to absorb losses, maintain operations, and support the broader economy during times of stress.