Common equity tier 1
Sector Deep DivesThe highest quality regulatory capital a bank holds, ordinary shares and retained earnings less goodwill and other deductions, measured against risk weighted assets.
Also written: CET1, CET1 ratio, common equity tier one
Common equity tier 1 is the capital that absorbs losses before anyone else takes one: ordinary shares, share premium, retained earnings and reserves, less deductions for goodwill, other intangibles and deferred tax assets that only have value if the bank earns future profits. The CET1 ratio divides that number by risk weighted assets.
The deductions are the part people skip and the part that connects straight to valuation. Because goodwill is deducted, an acquisition paid above book value consumes regulatory capital the day it completes, and impairing that goodwill later reduces accounting equity while leaving CET1 unchanged. That is the mechanical reason price to tangible book, rather than price to book, is the multiple that matches the constraint.
Above CET1 sit additional tier 1 instruments and then tier 2, mostly dated subordinated debt. Both count toward broader capital requirements and both absorb losses, but only after CET1 has gone, which is why CET1 is the ratio quoted in a results release.
The trap is quoting the ratio without the requirement. A CET1 ratio is not high or low on its own. What matters is the distance between it and the point at which distributions start being restricted, which is a different and usually much smaller number.
Worked example
Illustrative: a bank holds 60 of CET1 capital against 500 of risk weighted assets, so it reports a CET1 ratio of 12.0%.
It then writes off 6 of goodwill from an old acquisition. Reported book equity falls by 6 and the CET1 ratio does not move at all, because that goodwill had already been deducted from CET1 when it was recognised.
The accounting measure moved and the regulatory measure did not. That is exactly why the two are read separately, and why tangible book is the one that travels.