what is common equity tier 1 cet1 
common equity tier 1 cet1 is a component of tier 1 capital and comprises primarily of common stock held by a bank or other financial institution cet1 is a capital measure that was introduced in 2014 as a precautionary way to protect the economy from a financial crisis 1 banks are expected to meet the minimum cet1 ratio requirements to their risk weighted assets rwas as outlined by their financial regulators understanding common equity tier 1 cet1 the basel committee formulated a reformed set of international standards to review and monitor banks capital adequacy following the 2007 2008 financial crisis these standards which are collectively called basel iii compare a bank s assets with its capital to determine if the bank could stand the test of a crisis 2capital is required by banks to absorb unexpected losses that arise during the normal course of the bank s operations the basel iii framework tightens capital requirements by limiting the type of capital that a bank may include in its different capital tiers and structures 3a bank s capital structure consists of several tiers these include 4common equity tier 1 is the highest quality of regulatory capital as it absorbs losses immediately when they occur according to the bank of international settlements a bank s tier 1 capital must include a minimum ratio of 4 5 of cet1 to its rwas 5cet1 is a measure of bank solvency that gauges a bank s capital strength 6special considerationsa bank s capital structure consists of lower tier 2 upper tier 1 at1 and cet1 cet1 is at the bottom of the capital structure which means that any losses incurred are first deducted from this tier in the event of a crisis 5 if the deduction results in the cet1 ratio dropping below its regulatory minimum the bank must build its capital ratio back to the required level or risk being overtaken or shut down by regulators during the rebuilding phase regulators may prevent the bank from paying dividends or employee bonuses 7 in the case of insolvency the equity holders bear the losses first 8the european banking authority conducts stress tests using the cet1 ratio from time to time to understand how much capital banks would have left in the adverse event of a financial crisis the results of these tests have shown that most banks would be able to survive a crisis 9calculating cet1 capitaltier 1 capital is calculated as common equity tier 1 capital plus additional tier 1 capital cet1 comprises a bank s core capital and includes common shares stock surpluses resulting from the issue of common shares retained earnings common shares issued by subsidiaries and held by third parties and accumulated other comprehensive income aoci 5additional tier 1 capital is defined as instruments that are not common equity but are eligible for inclusion in this tier 5 an example of at1 capital is a contingent convertible or hybrid security which has a perpetual term and can be converted into equity when a trigger event occurs an event that causes a security to be converted to equity occurs when cet1 capital falls below a certain threshold this measure is better captured by the cet1 ratio which measures a bank s capital against its assets because not all assets have the same risk the assets acquired by a bank are weighted based on the credit risk and market risk that each asset presents for example a government bond may be characterized as a no risk asset and given a zero percent risk weighting on the other hand a subprime mortgage may be classified as a high risk asset and weighted 65 according to basel iii capital and liquidity rules all banks must have a minimum cet1 to rwas ratio of 4 5 10