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What is Tier 1 Capital?

Tier 1 Capital are the core asset holdings of a bank. They are disclosed, liquid, risk-averse assets, and are used by regulators to evaluate a bank's compliance with capital requirements.

Banks lend out about as much money as they can in general. They must have capital on hand to absorb losses and remain solvent. The Basel Accord is an international agreement dealing with capital reserve requirements for banks, enacted after the meltdown of 2008.

There have been three versions of the agreement, and Basel III is going into effect gradually between now and 2019. The regulations state that banks must have a Tier 1 capital ratio of 6% of more, part of the larger Capital Adequacy Ratio (CAR) requirements.

Tier 1 capital is mostly comprised of Shareholder Equity and Retained Earnings, and the ratio puts the total of these asset over the total Risk-Weighted Assets of the company, based on a weighting scale in the Basel Agreement.

What is Capital Structure?
What is Capital Accumulation?

Keywords: bank regulation, 2008, Basel Accord, Basel III, risk-weighting, Capital Adequacy Ratio (CAR), Capital to Risk Weighted Assets Ratio,