CET1 and Bank Capital Ratios

CET1 Headroom Is the Distribution Signal

Regulators do not ask whether a bank is “well capitalised” in the abstract. They compare Common Equity Tier 1 (CET1) capital to risk-weighted assets (RWA) against a firm-specific total requirement. The gap between reported CET1 and that requirement is headroom, and headroom is what shareholders care about when judging dividend and buyback capacity.

CET1 is common equity after regulatory deductions (goodwill, certain deferred tax assets, and other adjustments). RWA weights assets by credit, market, and operational risk, so a Treasury bill and a leveraged loan consume very different amounts of the denominator. That has a consequence worth holding on to: a bank can lift its CET1 ratio without raising a dollar of capital, by selling risky assets, hedging exposures or shifting the book into lower-weighted ones. The ratio is simple; the requirement stack underneath it is not.

The Requirement Stack

US large banks face a layered minimum (effective 1 Oct 2025 per Federal Reserve large-bank capital requirements):

Layer	Rate	Notes
CET1 minimum	4.5% of RWA	Basel III floor
Stress Capital Buffer (SCB)	Firm-specific; floor 2.5%	Set from CCAR stress test
G-SIB surcharge	≥1.0% if designated	Method 1 vs Method 2; updated annually

Verified total requirements (effective 1 Oct 2025):

Bank	Calculation	Total requirement
JPMorgan Chase	4.5% + 2.5% SCB + 4.5% G-SIB	11.5%
Citigroup	4.5% + 3.6% SCB + 3.5% G-SIB	11.6%
Bank of America	4.5% + 2.5% SCB + 3.0% G-SIB	10.0%
Wells Fargo	4.5% + 2.5% SCB + 1.5% G-SIB	8.5%

Only the 4.5% is a hard minimum. Everything above it is buffer: for banks in the stress-test population the Stress Capital Buffer replaced the old fixed 2.5% capital conservation buffer, and the G-SIB surcharge stacks on top of it. Slipping into that buffer does not close the bank. It caps dividends and buybacks as a share of the bank’s eligible retained income, on a sliding scale that tightens the deeper the shortfall runs. Which is why banks manage to stay clearly above the total requirement rather than above the 4.5% floor.

Verified FY2025 Headroom

End-FY2025 CET1 ratios versus binding total requirements:

Bank	CET1 (binding approach)	Requirement	Headroom	Buffer screen
JPMorgan Chase	14.1% (Advanced)	11.5%	+2.6 pp	Comfortable
Wells Fargo	10.61%	8.5%	+2.1 pp	Comfortable
Citigroup	13.2%	11.6%	+1.6 pp	Normal (+0.5 to +2.0 pp)
Bank of America	11.4%	10.0%	+1.4 pp	Normal
US Bancorp	10.8%	7.1%	+3.7 pp	Comfortable; the widest headroom in the set
PNC Financial	10.6% (estimated at 4Q release)	7.0%	+3.6 pp (on an estimated ratio)	Comfortable

JPMorgan’s headline Standardised ratio was 14.6% at year-end, but its Advanced approach ratio was 14.1%, and the lower of the two is the one that binds.

The two super-regionals sit near the bottom of the table on the headline ratio and at the top of it on headroom, because neither pays a G-SIB surcharge and both drew a low stress capital buffer: 4.5% plus 2.6% for US Bancorp, 4.5% plus 2.5% for PNC, effective 1 October 2025. That inversion is the point of the whole table. Bank of America holds a higher CET1 ratio than either and less room above its own requirement, so ranking banks on the headline ratio alone gets the capital question backwards.

House Buffer Screen

Headroom	Label	Distribution read
≥ requirement + 2.0 pp	Comfortable	Room for buybacks and dividend growth through moderate stress
+0.5 to 2.0 pp	Normal	Return capacity exists; less margin for error
Within +0.5 pp	Tight	Distribution cuts or capital raise risk if losses emerge

A bank must clear its requirement under both the Standardised and Advanced approaches, and the binding one can switch. At the end of FY2025 Advanced became the binding measure at JPMorgan for the first time in years, so the headroom it can actually spend is +2.6 pp, not the +3.1 pp its Standardised ratio implies. Take the lower of the two.

This is a desk screen, not a regulatory definition. JPMorgan at +2.6 pp and Wells Fargo at +2.1 pp sit in the comfortable band. Bank of America at +1.4 pp and Citigroup at +1.6 pp are normal: adequate, but a bad credit quarter narrows the gap faster.

Credit losses flow through CET1 via retained earnings and RWA. Rising charge-offs compress headroom from both sides. See our net charge-offs guide for the leading indicator.

Worked Example: Capital Walk

Illustrative large bank (primer teaching inputs):

Input	Value
Risk-weighted assets	$500bn
CET1 ratio	11.5% → CET1 capital $57.5bn
Total requirement	10.0% → required CET1 $50.0bn
Headroom	+1.5 pp → $7.5bn above requirement

Annual CET1 ratio walk (basis points on RWA):

Item	bp impact
Net income (retained)	+150 bp
Dividends (30% payout)	−45 bp
Buybacks	−70 bp
Net change	+35 bp per year

Starting at 11.5% with a 10.0% requirement, the bank adds 35 bp of CET1 ratio per year on this assumption set. Headroom widens from +1.5 pp toward +1.85 pp unless RWA growth or losses intervene. The arithmetic is how desk models connect earnings, payout, and distribution capacity.

Multiply headroom in pp by RWA to get dollar capacity: 1.5 pp × $500bn = $7.5bn of CET1 capital sitting above the requirement.

CET1 and P/TBV

Capital and valuation link through return of capital. Headroom is what permits a buyback, and a buyback spreads the same earnings over fewer shares, lifting EPS and ROTCE. Keep the direction on book value straight, because it runs the other way: a bank repurchasing above tangible book pays more than book for every share it retires, so tangible book per share falls. It buys the higher return on a smaller equity base, not a bigger book. Thin headroom removes the choice altogether, which caps the multiple even at strong ROTCE (see P/TBV vs ROTCE).

For the capital and return figures behind these rows, see the JPMorgan Chase, Bank of America, and Wells Fargo profiles.

What Matters Most

CET1 ratio alone is incomplete without the firm-specific requirement. JPMorgan at 14.1% on its binding approach looks similar to Citigroup at 13.2%, but requirements of 11.5% and 11.6% leave different headroom (+2.6 pp vs +1.6 pp) and different distribution risk. Screen headroom first; then ask whether earnings will build or consume it.