Definition
Basel III requires banks to maintain minimum capital ratios to absorb losses and protect depositors. Key metrics include Common Equity Tier 1 (CET1), Tier 1 Capital Ratio, and Total Capital Ratio. Risk-weighted assets (RWA) are the denominator—riskier assets require more capital. Systemically important banks face additional capital surcharges.
functions Formula
CET1 Ratio = Common Equity Tier 1 Capital / Risk-Weighted Assets
lightbulb Example
A bank has $10B in CET1 capital and $100B in risk-weighted assets. CET1 ratio = 10%. The Basel III minimum is 4.5%, plus capital buffers of 2.5-4.5%, requiring 7-9% effectively.
verified_user Key Points
- Basel III sets minimum capital requirements
- CET1 is the highest quality capital
- Risk-weighted assets adjust for asset riskiness
- Systemically important banks face surcharges