Common Equity Tier 1 (CET1) capital and Additional Tier 1 (AT1) capital are regulatory capital components used to measure a bank's financial strength and resilience. These are part of the Basel III framework, an international regulatory framework for banks developed by the Basel Committee on Banking Supervision.
Common Equity Tier 1 (CET1) Capital:
Definition: CET1 capital is the highest quality of regulatory capital. It mainly consists of common equity, which includes common shares and retained earnings.
Instruments: Common shares and retained earnings are the primary instruments that contribute to CET1 capital. Other regulatory adjustments may apply, and deductions may be made for items that do not meet the criteria for inclusion in CET1.
Purpose: CET1 capital is the core measure of a bank's financial strength. It serves as a cushion to absorb losses, enhances the resilience of the bank, and ensures that the bank can continue its operations even in stressful economic conditions.
Additional Tier 1 (AT1) Capital:
Definition: AT1 capital is a form of supplementary capital that banks can hold to meet regulatory capital requirements. It is considered to be of lower quality than CET1 capital but still contributes to a bank's overall capital adequacy.
Instruments: AT1 instruments are typically hybrid securities that combine debt and equity features. Common examples include contingent convertible bonds (CoCos) and perpetual bonds.
Purpose: AT1 capital provides an additional layer of loss-absorbing capital beyond CET1. AT1 instruments often include triggers that can convert the instruments into common equity or be written down in certain predefined circumstances, helping to absorb losses in times of financial stress.
Both CET1 and AT1 capital are critical for maintaining financial stability and ensuring that banks have sufficient capital to absorb losses. The Basel III framework sets specific regulatory requirements for the minimum levels of CET1 and AT1 capital that banks must maintain based on risk-weighted assets.
These requirements are designed to enhance the resilience of the banking sector and reduce the likelihood of financial crises. It's worth noting that regulatory frameworks can evolve, so the specific requirements may be subject to updates.
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