what is tier 1 capital 
tier 1 capital refers to the core capital held in a bank s reserves and is used to fund business activities for the bank s clients it includes common stock as well as disclosed reserves and certain other assets along with tier 2 capital the size of a bank s tier 1 capital reserves is used as a measure of the institution s financial strength regulators require banks to hold certain levels of tier 1 and tier 2 capital as reserves in order to ensure that they can absorb large losses without threatening the stability of the institution under the basel iii accord the minimum tier 1 capital ratio was set at 6 of a bank s risk weighted assets 1investopedia hilary allisonunderstanding tier 1 capitaltier 1 capital represents the core equity assets of a bank or financial institution it is largely composed of disclosed reserves also known as retained earnings and common stock it can also include noncumulative nonredeemable preferred stock as defined by the basel iii standard tier 1 capital has two components common equity tier 1 cet1 and additional tier 1 capital at1 cet1 is the highest quality of capital and can absorb losses immediately as they occur this category includes common shares retained earnings accumulated other comprehensive income and qualifying minority interest minus certain regulatory adjustments and deductions 2additional tier 1 capital includes noncumulative nonredeemable preferred stock and related surplus and qualifying minority interest these instruments can also absorb losses although they do not qualify for cet1 2the 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 are weighted by credit risk most central banks set formulas for asset risk weights according to the basel committee s guidelines tier 1 capital shouldn t be confused with common equity tier 1 cet1 capital tier 1 includes cet1 as well as additional tier 1 capital tier 1 capital vs tier 2 capitalin the basel accords the basel committee on banking supervision set the regulatory standards for tier 1 and tier 2 capital that must be reserved by any financial institution tier 2 capital has a lower standard than tier 1 and is harder to liquidate it includes hybrid capital instruments loan loss and revaluation reserves as well as undisclosed reserves 3the difference between tier 1 and tier 2 capital reserves relates to the purpose of those reserves tier 1 capital is described as going concern capital that is it is intended to absorb unexpected losses and allow the bank to continue operating as a going concern tier 2 capital is described as gone concern capital in the event of a bank failure these assets are used to defray the bank s obligations before depositors lenders and taxpayers are affected 2while the basel agreements create a broad standard among international regulators implementation will vary in each country changes to tier 1 capital ratiosthe minimum requirements for tier 1 and tier 2 capital were set by the basel accords a set of international regulatory agreements set by a committee of central banks and national bodies under the original basel i agreement the minimum ratio of capital to risk weighted assets was set at 8 following the 2007 8 financial crisis the basel committee met again to address the weaknesses that the crisis had exposed in the banking system the basel iii agreement published in 2010 raised the capital requirements and introduced more stringent disclosure requirements it also introduced the distinction between tier 1 and tier 2 capital under the new guidelines the minimum cet1 capital ratio was set at 4 5 and the minimum tier 1 capital ratio cet1 at1 was set at 6 the total amount of reserve capital tier 1 and tier 2 must be over 8 2these standards were further amended by the basel iv standards in 2017 which started implementation in january 2023 4 the effects of the revised standards will vary depending on each bank s business model 