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Regulatory Capital Requirements Cheat Sheet

Regulatory capital requirements set the minimum amount of capital banks must hold to absorb losses and protect depositors. These rules — primarily Basel III and its US implementation — determine how much banks can lend, pay dividends, and buy back stock. Understanding them is essential for analyzing bank stocks and the financial system.

Basel III Capital Requirements Stack

ComponentCET1Tier 1Total Capital
Minimum Requirement4.5%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

TierIncludesKey Characteristics
CET1 (Common Equity Tier 1)Common stock, retained earnings, AOCIHighest quality — absorbs losses first
Additional Tier 1 (AT1)Preferred stock, CoCo bondsCan be written down or converted to equity
Tier 2Subordinated debt (5+ year maturity), loan loss reservesAbsorbs 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 CategoryRisk WeightEffective Capital Needed (at 7% CET1)
Cash & Treasuries0%$0 per $100
Agency MBS (Fannie/Freddie)20%$1.40 per $100
Residential Mortgages50%$3.50 per $100
Commercial Loans100%$7.00 per $100
Equity Investments100%–400%$7.00–$28.00 per $100

US Stress Testing Framework (CCAR / DFAST)

FeatureDFASTCCAR
Full NameDodd-Frank Act Stress TestComprehensive Capital Analysis & Review
Who Must ComplyBanks with $100B+ assetsBanks with $100B+ assets
PurposeTest if banks maintain minimum capital under stressEvaluate capital plans (dividends, buybacks)
ScenariosBaseline, Adverse, Severely AdverseSame + bank’s own scenarios
Key OutputProjected capital ratios under stressStress Capital Buffer (SCB) determination
Consequence of FailureMust submit remediation planCannot 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.

RequirementApplies ToStandard
G-SIB SurchargeUS G-SIBs1.0% – 3.5% additional CET1 (JPM highest at 3.5%)
TLAC (Total Loss Absorbing Capacity)US G-SIBs18% of RWA + buffers (long-term debt requirement)
Supplementary Leverage Ratio (SLR)All large banks3% minimum; 5% for G-SIB holding companies
LCR (Liquidity Coverage Ratio)Large banks100% — sufficient HQLA for 30-day stress
NSFR (Net Stable Funding Ratio)Large banks100% — stable funding matches illiquid assets
Analyst Tip
The Stress Capital Buffer (SCB) replaced the fixed capital conservation buffer for large US banks. It’s based on the Fed’s annual stress test results and varies by bank. A high SCB limits a bank’s ability to pay dividends and buy back stock. Watch the annual CCAR results (released each June) — they directly determine capital return capacity. See the banking ratios cheat sheet for the metrics that feed into these calculations.

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.