What is the Tier 1 capital ratio?

What is the Tier 1 capital ratio?

The tier 1 capital ratio is the ratio of a bank’s core tier 1 capital—that is, its equity capital and disclosed reserves—to its total risk-weighted assets. 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.

Is a high Tier 1 capital ratio good?

Capital is broken down as Tier-1, core capital, such as equity and disclosed reserves, and Tier-2, supplemental capital held as part of a bank’s required reserves. A bank with a high capital adequacy ratio is considered to be above the minimum requirements needed to suggest solvency.

What are the components of Tier 1 capital?

The major components of Tier 1 capital are equity share capital, equity share premium, statutory reserves, general reserves, special reserve (Section 36(i)(viii)) and capital reserves (other than revaluation reserves).

How do you calculate Tier 1 capital on a balance sheet?

The acceptable amount of Tier 1 capital held by a bank is at least 6%. The formula is core capital divided by risk-weighted assets multiplied by 100 to get the final percentage.

What exactly is meant by Tier 1 and Tier 2 capital?

Tier 1 capital is a bank’s core capital, whereas tier 2 capital is a bank’s supplementary capital. A bank’s total capital is calculated by adding its tier 1 and tier 2 capital together. Regulators use the capital ratio to determine and rank a bank’s capital adequacy.

What is a Tier 1 risk based capital ratio?

Tier-1 risk based capital is the ratio of a bank’s “core capital” to its risk-weighted assets. Bank capital can be defined in many ways, and this ratio takes a rather restricted look at it. Risk-weighted assets are constructed by assigning different weights to assets with different levels of risk and summing the totals.

What is Tier 1 risk-adj capital ratio?

The Tier 1 Capital Ratio compares a bank’s equity capital with its total risk-weighted assets (RWAs). RWAs are all assets held by a bank that is weighted by credit risk. Most central banks set formulas for asset risk weights according to the Basel Committee’s guidelines. Tier 1 capital is the primary funding source of the bank.

What exactly is a Tier 1 capital?

Tier 1 capital is a bank’s core capital. This consists of common stock and disclosed reserves (retained earnings). Financial regulators use Tier 1 capital as a means of measuring a bank’s solvency, i.e. it is the core measure of the financial strength of a bank, from a regulator’s point of view.