{"id":14406,"date":"2026-05-27T07:42:30","date_gmt":"2026-05-27T07:42:30","guid":{"rendered":"https:\/\/lemonn.co.in\/blog\/glossary\/tier-1-capital\/"},"modified":"2026-05-27T07:42:30","modified_gmt":"2026-05-27T07:42:30","slug":"tier-1-capital","status":"publish","type":"glossary","link":"https:\/\/lemonn.co.in\/blog\/glossary\/tier-1-capital\/","title":{"rendered":"Tier 1 Capital"},"content":{"rendered":"

Tier 1 Capital<\/a> is the core capital of a bank, representing its most stable and loss-absorbing financial resources. It is the primary measure of a bank’s financial strength and is the foundation of the Capital Adequacy Ratio framework under Basel norms.<\/p>\n

What Is Tier 1 Capital?<\/h2>\n

Tier 1 Capital consists of:<\/p>\n

**Common Equity<\/a> Tier 1 (CET1):**
\n– Paid-up share capital (equity)
\n– Share premium<\/a> (amount received above face value<\/a>)
\n– Retained earnings and reserves
\n– Accumulated other comprehensive income<\/p>\n

**Additional Tier 1 (AT1):**
\n– Perpetual bonds<\/a> that can absorb losses (AT1 bonds<\/a>)
\n– Instruments with no maturity date that convert to equity or are written down under specified stress conditions<\/p>\n

Tier 1 Capital must be at least 6% of Risk-Weighted Assets<\/a> under Basel III, of which CET1 must be at least 4.5%.<\/p>\n

Why Tier 1 Capital Is Important<\/h2>\n

Tier 1 capital is the “going concern” capital. It absorbs losses while the bank continues to operate, protecting depositors and the financial system without needing government intervention.<\/p>\n

Unlike Tier 2 capital<\/a>, Tier 1 capital is permanently available, with no maturity and no requirement to pay distributions if the bank is in stress.<\/p>\n

AT1 Bonds<\/a>: A Risk Instrument<\/h2>\n

AT1 (Additional Tier 1) bonds are a form of perpetual debt that counts as Tier 1 capital. They:
\n– Pay interest as long as the bank is profitable
\n– Interest can be skipped if the bank’s capital falls below a threshold
\n– Can be permanently written down or converted to equity under stress
\n– Are not guaranteed; investors take equity-like risk<\/p>\n

The Yes Bank crisis of 2020 saw AT1 bonds worth Rs 8,415 crore written off to zero, causing large losses for retail investors who had bought them expecting bond-like safety.<\/p>\n

Practical Example<\/h2>\n

Bank A has equity capital of Rs 1,000 crore, retained earnings of Rs 300 crore, and has issued AT1 bonds of Rs 200 crore. Tier 1 Capital = Rs 1,000 + Rs 300 + Rs 200 = Rs 1,500 crore. With risk-weighted assets of Rs 15,000 crore, Tier 1 CAR = 10%.<\/p>\n

Key Takeaways<\/h2>\n

– Tier 1 Capital is a bank’s core equity and equivalent instruments; the primary loss absorber
\n– Consists of Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1) components
\n– Under Basel III\/RBI, Tier 1 CAR must be at least 6% of Risk-Weighted Assets
\n– AT1 bonds can be written off or converted to equity in stress; retail investors should understand this risk
\n– Higher Tier 1 Capital means stronger financial position and lower risk of failure<\/p>\n","protected":false},"excerpt":{"rendered":"

Tier 1 Capital is the core capital of a bank, representing its most stable and loss-absorbing financial resources. It is the primary measure of a bank’s financial strength and is the foundation of the Capital Adequacy Ratio framework under Basel norms. What Is Tier 1 Capital? Tier 1 Capital consists of: **Common Equity Tier 1 […]<\/p>\n","protected":false},"author":3,"featured_media":0,"menu_order":0,"template":"","meta":{"_uag_custom_page_level_css":"","footnotes":""},"class_list":["post-14406","glossary","type-glossary","status-publish","hentry"],"blocksy_meta":[],"uagb_featured_image_src":{"full":false,"thumbnail":false,"medium":false,"medium_large":false,"large":false,"1536x1536":false,"2048x2048":false,"web-stories-poster-portrait":false,"web-stories-publisher-logo":false,"web-stories-thumbnail":false},"uagb_author_info":{"display_name":"Team Lemonn","author_link":"https:\/\/lemonn.co.in\/blog\/author\/ashu\/"},"uagb_comment_info":0,"uagb_excerpt":"Tier 1 Capital is the core capital of a bank, representing its most stable and loss-absorbing financial resources. It is the primary measure of a bank’s financial strength and is the foundation of the Capital Adequacy Ratio framework under Basel norms. What Is Tier 1 Capital? Tier 1 Capital consists of: **Common Equity Tier 1…","_links":{"self":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary\/14406","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary"}],"about":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/types\/glossary"}],"author":[{"embeddable":true,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/users\/3"}],"version-history":[{"count":0,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary\/14406\/revisions"}],"wp:attachment":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/media?parent=14406"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}