Financial Calculators

Common Equity Tier 1 (CET1)

Common Equity Tier 1 (CET1)

Risk weighted asssets
Tier 1 Core Capital
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Table of contents

What is Common Equity Tier 1 Capital?
How does CET1 Relate to Banking and Silicon Valley Bank Collapse?
Silicon Valley Bank Collapse due to asset risk
How to use the CET Risky Assets Ratio Calculator
What is an acceptable asset range?

What is Common Equity Tier 1 Capital?

As the saying goes, history tends to repeat itself, and the world of banking is no exception. The 2008 Global Financial Crisis revealed the vulnerability of the banking system, leading to calls for tighter regulations to prevent future collapses. Basel III was introduced to address these concerns, focusing on the capital adequacy requirements of banks to ensure they maintain adequate capital to cushion against financial distress.
One of the significant changes that Basel III introduced was the limitation of the types of capital that banks could hold in their capital structure. This move aimed to ensure that banks held sufficient capital to absorb losses resulting from the regular operations of the business.

How does CET1 Relate to Banking and Silicon Valley Bank Collapse?

Common Equity Tier 1 (CET1) is the most critical component of a bank's capital structure. It represents the bank's core capital, including ordinary shares, retained earnings, stock surpluses, and common shares held by subsidiaries of the company. The Tier 1 Capital Ratio is calculated by taking a bank's core capital relative to its risk-weighted assets.
The calculation of the Tier 1 Capital Ratio is critical in assessing a bank's ability to withstand financial distress. A higher ratio indicates that the bank has more core capital to absorb losses, while a lower ratio suggests that the bank has insufficient capital to cushion against losses. Therefore, it is essential to ensure that the Tier 1 Capital Ratio is within the acceptable range to mitigate the risk of collapse.

Silicon Valley Bank Collapse due to asset risk

The Silicon Valley Bank (SVB) collapse in March 2023 serves as a recent example of the importance of maintaining adequate CET1 capital. The bank collapsed due to its exposure to high-risk assets, leading to a massive haircut on venture capital funding. This event emphasizes the significance of maintaining the Tier 1 Capital Ratio within an acceptable range to avoid the negative consequences of financial distress.

How to use the CET Risky Assets Ratio Calculator

To help you determine whether your asset ratio is within an acceptable range, offers a CET Risky Assets Ratio Calculator. This calculator is designed to assess the ratio of a bank's CET1 capital to its risky assets. The risky assets are assigned weights based on their level of credit risk, with higher weights indicating higher risk.

What is an acceptable asset range?

To use the CET Risky Assets Ratio Calculator, input your CET1 capital and the value of your risky assets. The calculator will then compute the CET Risky Assets Ratio, indicating whether your asset ratio is risky or not. A ratio of less than 4.5% indicates that the bank's asset ratio is risky, while a ratio above 4.5% suggests that the bank's asset ratio is within an acceptable range.
In conclusion, the CET Risky Assets Ratio Calculator is an essential tool for assessing a bank's asset ratio and mitigating the risk of financial distress. Maintaining an acceptable Tier 1 Capital Ratio is critical to the survival of any bank, and the calculator is an excellent resource to help you achieve this goal. Remember, a healthy CET1 capital ratio is key to avoiding the negative consequences of financial distress and ensuring the stability of the banking system.
John Cruz
Article author
John Cruz
John is a PhD student with a passion to mathematics and education. In his freetime John likes to go hiking and bicycling.
Common Equity Tier 1 (CET1) English
Published: Mon Mar 27 2023
In category Financial calculators
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