Regulatory Capital Requirements Cheat Sheet
Basel III Capital Requirements Stack
| Component | CET1 | Tier 1 | Total Capital |
|---|---|---|---|
| Minimum Requirement | 4.5% | 6.0% | 8.0% |
| Capital Conservation Buffer (CCB) | +2.5% | +2.5% | +2.5% |
| Effective Minimum (with CCB) | 7.0% | 8.5% | 10.5% |
| G-SIB Surcharge (large banks) | +1.0% to +3.5% | — | — |
| Countercyclical Buffer (if activated) | +0% to +2.5% | — | — |
| Stress Capital Buffer (SCB) | +2.5%+ (replaces CCB for large banks) | — | — |
Capital Tiers Explained
| Tier | Includes | Key Characteristics |
|---|---|---|
| CET1 (Common Equity Tier 1) | Common stock, retained earnings, AOCI | Highest quality — absorbs losses first |
| Additional Tier 1 (AT1) | Preferred stock, CoCo bonds | Can be written down or converted to equity |
| Tier 2 | Subordinated debt (5+ year maturity), loan loss reserves | Absorbs losses in resolution / liquidation |
Risk-Weighted Assets (RWA)
Capital ratios are calculated against risk-weighted assets, not total assets. Different asset classes carry different risk weights under the standardized approach.
| Asset Category | Risk Weight | Effective Capital Needed (at 7% CET1) |
|---|---|---|
| Cash & Treasuries | 0% | $0 per $100 |
| Agency MBS (Fannie/Freddie) | 20% | $1.40 per $100 |
| Residential Mortgages | 50% | $3.50 per $100 |
| Commercial Loans | 100% | $7.00 per $100 |
| Equity Investments | 100%–400% | $7.00–$28.00 per $100 |
US Stress Testing Framework (CCAR / DFAST)
| Feature | DFAST | CCAR |
|---|---|---|
| Full Name | Dodd-Frank Act Stress Test | Comprehensive Capital Analysis & Review |
| Who Must Comply | Banks with $100B+ assets | Banks with $100B+ assets |
| Purpose | Test if banks maintain minimum capital under stress | Evaluate capital plans (dividends, buybacks) |
| Scenarios | Baseline, Adverse, Severely Adverse | Same + bank’s own scenarios |
| Key Output | Projected capital ratios under stress | Stress Capital Buffer (SCB) determination |
| Consequence of Failure | Must submit remediation plan | Cannot increase dividends or buybacks |
G-SIB Requirements
Global Systemically Important Banks face additional capital surcharges, TLAC requirements, and enhanced supervision. The eight US G-SIBs (JPMorgan, BofA, Citigroup, Goldman Sachs, Morgan Stanley, Wells Fargo, BNY Mellon, State Street) must maintain higher capital buffers proportional to their systemic importance score.
| Requirement | Applies To | Standard |
|---|---|---|
| G-SIB Surcharge | US G-SIBs | 1.0% – 3.5% additional CET1 (JPM highest at 3.5%) |
| TLAC (Total Loss Absorbing Capacity) | US G-SIBs | 18% of RWA + buffers (long-term debt requirement) |
| Supplementary Leverage Ratio (SLR) | All large banks | 3% minimum; 5% for G-SIB holding companies |
| LCR (Liquidity Coverage Ratio) | Large banks | 100% — sufficient HQLA for 30-day stress |
| NSFR (Net Stable Funding Ratio) | Large banks | 100% — stable funding matches illiquid assets |
Key Takeaways
- CET1 ratio (minimum 4.5% + buffers) is the binding capital constraint for most banks.
- Risk-weighted assets determine how much capital each dollar of lending requires — Treasuries = 0%, commercial loans = 100%.
- US G-SIBs face extra surcharges (1.0%–3.5%) on top of standard Basel III minimums.
- Annual stress tests (CCAR) determine each bank’s Stress Capital Buffer and capital return capacity.
- TLAC and long-term debt requirements ensure G-SIBs can be resolved without taxpayer bailouts.
FAQ
What happens if a bank breaches its capital requirements?
If a bank falls below the CET1 minimum plus buffers, it faces automatic restrictions on dividends, share buybacks, and discretionary bonus payments. The restrictions increase as capital ratios fall further below the buffer threshold. Below the absolute minimum, regulators can force recapitalization or resolution.
What is the difference between CET1 and the leverage ratio?
CET1 ratio uses risk-weighted assets in the denominator — different assets carry different weights. The leverage ratio uses total assets (no risk weighting). The leverage ratio acts as a backstop to prevent banks from gaming risk weights.
What is TLAC and why does it exist?
Total Loss Absorbing Capacity ensures that G-SIBs have enough long-term debt and capital to absorb losses in a failure scenario without requiring a government bailout. It was created after the 2008 financial crisis to end “too big to fail.”
How do stress tests affect bank stock prices?
Stress test results (released annually in June) directly determine how much capital banks can return to shareholders. A better-than-expected result means higher buybacks and dividends, which typically boosts the stock. A disappointing result limits capital returns and weighs on the stock.
What is Basel III endgame?
Basel III endgame (also called Basel IV) is a set of proposed rule changes that would increase capital requirements for the largest US banks by revising how risk-weighted assets are calculated. It would particularly impact trading, operational risk, and market risk capital charges.