Tier 1 capital

A bank's core capital under the capital rule: common equity tier 1 plus additional tier 1. The minimums are 6 percent of risk-weighted assets and a 4 percent leverage ratio.

Tier 1 capital is the capital that takes losses first while a bank is operating. The capital rule defines it as common equity tier 1 capital, mostly common stock and retained earnings, plus additional tier 1 capital.

The rule sets minimum ratios. A bank must hold common equity tier 1 of 4.5 percent, tier 1 of 6 percent and total capital of 8 percent of risk-weighted assets, plus a leverage ratio of 4 percent, which is tier 1 capital against average total assets. A qualifying community bank with under $10 billion in assets can choose a simpler test, the community bank leverage ratio, and meet all of these by keeping its leverage ratio above 8 percent.

A borrower rarely sees these ratios, but tier 1 capital sits under most limits on loan size. The lending limit for one borrower starts from it. The concentration measures for commercial real estate and construction divide by capital built on it. A bank with $50,000,000 of tier 1 capital can hold far larger loans than one with $10,000,000, whatever their branch counts.

Credit unions do not report tier 1 capital. Their comparable figure is net worth.

Go further

• Data dictionary: Every field this site loads and where it comes from.
• Legal lending limit estimate: Turn a capital figure into a loan size.
• Legal lending limit estimate: The most a bank can lend to one borrower, from public capital figures. Always an estimate.
• How to read a bank call report as a loan searcher: Every bank files a call report each quarter. One schedule in it lists the bank's loans by kind. Read that schedule and you know what the bank holds. You still do not know what it made last quarter.
• The legal lending limit, explained: A bank may not lend more than a set share of its capital to one borrower. The rule explains why a large loan gets shared, and why a lender can say a request is too big for it.
• How to pick banks for a deal with public data: Public filings cannot tell you which bank will say yes. They can tell you which banks are large enough, already hold loans like yours and lend where the property is. That is enough to turn four thousand banks into six phone calls.

Related terms

• Total risk-based capital: The sum of a bank's tier 1 and tier 2 capital. The capital rule requires it to be at least 8 percent of the bank's risk-weighted assets.
• Capital and surplus: The capital base a national bank's lending limit is measured against: tier 1 and tier 2 capital plus the part of the loan loss allowance that tier 2 leaves out.
• Allowance for credit losses: The reserve a lender builds through charges against earnings for the loan losses it expects, which brings the loans on its books down to the amount it expects to collect.
• Legal lending limit: The most a bank may have outstanding to one borrower by law. For national banks it is 15 percent of capital and surplus, plus 10 percent more when the extra is fully secured by readily marketable collateral.
• Call report: The financial report every bank and savings association files with its federal regulator each quarter, with a balance sheet, an income statement and schedules that break out loans by kind.
• Net worth ratio: A credit union's net worth divided by its total assets, as a percentage. NCUA treats 7 percent or more as well capitalized and 6 percent as adequately capitalized.

Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.