What Basel III capital ratio is Common Equity Tier 1 capital divided by risk-weighted assets?

The Basel III capital ratio formed by dividing Common Equity Tier 1 capital by risk-weighted assets is the Common Equity Tier 1 ratio, or CET1 ratio.

CET1 is intended to capture a bank’s highest-quality loss-absorbing capital, chiefly common shares and retained earnings, after regulatory deductions such as goodwill and some intangible assets. Risk-weighted assets, meanwhile, adjust exposures according to their credit, market, and operational risk rather than simply adding balance-sheet totals.

Basel III introduced the framework after the 2007–09 global financial crisis, building on the earlier Basel I and Basel II accords. Its minimum CET1 requirement was set at 4.5% of risk-weighted assets, before adding capital-conservation and other applicable buffers.

A common mix-up is the leverage ratio. That measure uses Tier 1 capital divided by a broad leverage exposure and is not risk-weighted; Basel III’s minimum leverage ratio is generally 3%. The total capital ratio is broader still because it includes Tier 2 capital.