The Tier 1 capital ratio is an important indicator of the risk-bearing capacity of credit institutions and has received increased attention since the financial crisis in 2008.
In contrast to the own funds ratio, the Tier 1 capital ratio only takes into account the highest quality own funds that can be used directly to cover losses. These are the so-called core capital or Tier 1 capital.
The Tier 1 capital ratio puts the core capital in relation to the risk-weighted assets. Risk-weighted assets are assets for which the risk of losses is higher, such as loans to companies or sovereigns. Taking Tier 1 capital into account ensures that a credit institution has sufficient own funds to offset losses.
The Tier 1 capital ratio is an important indicator of the stability and risk-bearing capacity of credit institutions. A high Tier 1 capital ratio indicates that a credit institution is able to absorb losses without getting into financial difficulties. Credit institutions with a high core capital ratio are considered more stable and are usually also better able to grant new loans.
The supervisory authorities set minimum requirements for the core capital ratio to ensure that credit institutions have sufficient own funds. These requirements can vary depending on the risk profile of the bank. Credit institutions must regularly report their core capital ratio and ensure that they meet the requirements of the supervisory authorities.
