CET1 Ratio
Definition
The Common Equity Tier 1 ratio is a bank's highest-quality capital — common shares, retained earnings, and certain reserves, less regulatory deductions such as goodwill and most intangibles — divided by risk-weighted assets. It is the headline solvency metric under the Basel III framework.
The Basel III minimum CET1 ratio is 4.5% of RWA, but binding requirements are much higher once buffers are added: a 2.5% capital conservation buffer, surcharges for global systemically important banks, countercyclical buffers where activated, and — in the US — firm-specific stress capital buffers set via the Fed's stress tests. Large banks therefore typically operate with CET1 ratios well into the double digits.
Falling below buffer requirements triggers restrictions on dividends and buybacks, which is why capital return capacity is framed in terms of 'excess capital' above the requirement.
Why interviewers ask
In FIG interviews, CET1 is the gateway to bank capital questions: what counts as CET1, why goodwill is deducted, and how capital requirements constrain buybacks, dividends, and M&A (a bank acquisition consumes CET1 through goodwill creation). Knowing the 4.5% floor plus buffers — without quoting a specific bank's current ratio from memory — is the right calibration.
Related terms
Interviews don't test definitions — they test recall under pressure.
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