Common Equity Tier 1 (CET1)

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Definition of 'Common Equity Tier 1 (CET1)'

Common Equity Tier 1 (CET1) is the highest quality capital that a bank can hold. It consists of common stock, retained earnings, and certain other instruments that are considered to be equivalent to common stock. CET1 is used to calculate a bank's capital adequacy ratio, which is a measure of its ability to withstand financial stress.

The Basel III capital adequacy framework, which was adopted by the Basel Committee on Banking Supervision in 2010, requires banks to hold a minimum level of CET1 capital. The minimum level of CET1 capital is set at 4.5% of a bank's risk-weighted assets. Banks that do not meet the minimum CET1 requirement are subject to regulatory sanctions, such as restrictions on their ability to take on new risks.

CET1 is important because it provides a buffer against losses that a bank may suffer. If a bank experiences losses, it can use its CET1 capital to absorb the losses and continue to operate. CET1 is also important because it helps to protect depositors and other creditors of a bank in the event of a bank failure.

There are a number of factors that can affect a bank's CET1 ratio. These factors include the bank's level of risk-weighted assets, its profitability, and its capital structure. Banks with a high level of risk-weighted assets will need to hold more CET1 capital than banks with a low level of risk-weighted assets. Similarly, banks that are profitable and have a strong capital structure will be able to hold less CET1 capital than banks that are unprofitable and have a weak capital structure.

The CET1 ratio is a key metric that is used to assess the financial strength of a bank. Banks with a high CET1 ratio are considered to be more financially sound than banks with a low CET1 ratio.

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