what does the tier 1 common capital ratio tell you 
a firm s risk weighted assets include all assets that the firm holds that are systematically weighted for credit risk central banks typically develop the weighting scale for different asset classes cash and government securities carry zero risk while a mortgage loan or car loan would carry more risk the risk weighted assets would be assigned an increasing weight according to their credit risk cash would have a weight of 0 while loans of increasing credit risk would carry weights of 20 50 or 100 regulators use the tier 1 common capital ratio to grade a firm s capital adequacy as one of the following well capitalized adequately capitalized undercapitalized significantly undercapitalized or critically undercapitalized to be classified as well capitalized a firm must have a tier 1 common capital ratio of 7 or greater and not pay any dividends or distributions that would reduce that ratio below 7 a firm characterized as a systemically important financial institution sifi is subject to an additional 3 cushion for its tier 1 common capital ratio making its threshold to be considered well capitalized at 10 firms not considered well capitalized are subject to restrictions on paying dividends and share buybacks the tier 1 common capital ratio differs from the closely related tier 1 capital ratio tier 1 capital includes the sum of a bank s equity capital its disclosed reserves and non redeemable non cumulative preferred stock tier 1 common capital however excludes all types of preferred stock as well as non controlling interests tier 1 common capital includes the firm s common stock retained earnings and other comprehensive income bank investors pay attention to the tier 1 common capital ratio because it foreshadows whether a bank has not only the means to pay dividends and buy back shares but also the permission to do so from regulators the federal reserve assesses a bank s tier 1 common capital ratio during stress tests to discern whether a bank can withstand economic shocks and market volatility example of the tier 1 common capital ratioas an example assume a bank has 100 billion of risk weighted assets after assigning the corresponding weights for its cash credit lines mortgages and personal loans its tier 1 common capital includes 4 billion of common stock and 4 billion of retained earnings leading to total tier 1 common capital of 8 billion the company also issued 500 million in preferred shares dividing the tier 1 common capital of 8 billion less the 500 in preferreds by total risk weighted assets of 100 billion yields a tier 1 common capital ratio of 7 5 if we were instead computing the standard tier 1 capital ratio it would be calculated as 8 since it would include the preferred shares 