Published November 14, 2026 · By Henry Palma

What Is Basel Capital? CET1, Risk-Weighted Assets & the Math

Basel capital is a loss cushion sized to risk. Learn CET1, risk-weighted assets, the minimums plus the buffer, and where the 2026 U.S. proposals stand.

Capital is a loss cushion, not cash in a vault. When a bank loses money, the loss hits capital first, before depositors or creditors. This post explains Basel capital in plain English: the capital stack, risk-weighted assets, the minimums plus the buffer, and what it means for a regional bank. We use a fictional bank, Ridgeway Regional, for the math.

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Meet Ridgeway, and what capital is

Ridgeway Regional Bank is fictional, and we use it for teaching. It has about $9 billion in assets: $6 billion of loans to businesses, real estate, and homebuyers, $1.9 billion of Treasuries and agency bonds, and $792 million of common equity.

Capital is the owners' money: what's left if you sold every asset and paid every debt. It isn't cash sitting idle. Ridgeway's capital is already working, funding loans.

Basel is named after the Swiss city where the Basel Committee meets. In 1988, Basel I set the first global rule: capital of at least 8% of risk-weighted assets. In 2004, Basel II made the weights more risk-sensitive. In 2010, after the 2008 crisis, Basel III demanded more, and better, common equity. And in 2017, the committee finished the last pieces, often called the endgame. The spirit: hold capital in proportion to risk, so riskier assets need a bigger cushion.

The capital stack

Not all capital is equal. The best is common equity tier 1, or CET1: common stock plus retained earnings, minus deductions like goodwill. Next is additional tier 1, mostly preferred stock that never matures and can stop paying. Then tier 2: subordinated debt, plus part of the loan-loss reserves.

Ridgeway has $792 million of CET1, plus $50 million of preferred, so $842 million of tier 1. Add $110 million of tier 2, and total capital is $952 million.

Tier 2 is the backup layer. Ridgeway has $40 million of subordinated debt. It must run at least five years, and in its last five years it counts 20% less each year. Ridgeway also counts $70 million of its loan-loss allowance, which is allowed only up to 1.25% of risk-weighted assets, about $82 million. Together, that's $110 million. The spirit: tier 1 keeps the bank open. Tier 2 is there to protect depositors if it fails.

The math: capital divided by risk-weighted assets

A capital ratio is capital divided by risk-weighted assets, or RWA. Each type of asset gets a risk weight, from zero to 150%. You multiply every balance by its weight and add them up. That's why a Treasury bill needs far less capital than a construction loan.

Here's Ridgeway:

Cash and Treasuries, $900 million, weigh zero.
Agency bonds, $1 billion at 20%, count as $200 million.
Home mortgages, $1.6 billion at 50%, count as $800 million.
Business and real estate loans, $4.2 billion at 100%, count in full.
High-volatility construction loans, $200 million at 150%, count as $300 million.
And other assets, $1.1 billion at 100%.

So $9 billion of assets becomes $6.6 billion of risk-weighted assets.

Now divide. $792 million of CET1 over $6.6 billion is a 12% CET1 ratio. $842 million of tier 1 is 12.8%. And $952 million of total capital is 14.4%.

Minimums, the buffer, and well capitalized

The minimums are 4.5% for CET1, 6% for tier 1, and 8% for total capital. On top of each sits a 2.5% capital conservation buffer, made of CET1. So the real targets are 7%, 8.5%, and 10.5%. Ridgeway clears all three. To remember them: four and a half, six, eight, then add two and a half.

Above the minimum plus buffer, nothing happens to payouts. Dip into the buffer, and the bank faces limits on dividends, buybacks, and executive bonuses. The deeper the dip, the tighter the limit. The spirit: the buffer is meant to be used in bad times, but using it costs you payouts.

The buffer is cut into four slices. With more than 2.5% of buffer left, there's no limit. Above 1.875%, you can pay out at most 60% of eligible retained income. Above 1.25%, 40%. Above 0.625%, 20%. Below that, nothing at all. If Ridgeway's CET1 fell to 6.5%, it would have 2 points of buffer left, so it could pay out at most 60%.

There's a second set of lines, from prompt corrective action. To be called well capitalized, a bank needs a CET1 ratio of 6.5%, tier 1 of 8%, total capital of 10%, and a leverage ratio of 5%. Fall below these lines, and supervisors step in, earlier and harder as capital falls. Ridgeway is comfortably well capitalized on all four.

Two levers, and growth that eats capital

A capital ratio has two levers. Lever one is the top: add capital. To lift Ridgeway from 12% to 13%, it could add $66 million of CET1, by retaining earnings or issuing stock. Lever two is the bottom: shrink risk-weighted assets. Ridgeway could instead cut RWA by about $508 million, for example by shifting into lower-weight assets. Same ratio, very different business decisions.

Growth eats capital. Say Ridgeway grows 8% next year. Risk-weighted assets rise by $528 million. To hold a 12% CET1 ratio, it needs $63 million more CET1. If it earns $85 million after tax, that leaves only about $22 million for dividends. Growth, dividends, and the capital ratio all come out of the same earnings, so the capital plan and the growth plan have to be the same plan.

The leverage ratio and the community bank shortcut

There's also a leverage ratio, with no risk weights at all: tier 1 capital divided by average total assets. It's a backstop in case the risk weights are wrong. The minimum is 4%, and 5% to be called well capitalized. Ridgeway's is $842 million over $9 billion, about 9.4%.

For banks under $10 billion, there's a shortcut: the community bank leverage ratio, or CBLR. A qualifying bank can opt in, keep a leverage ratio above 8%, and skip the risk-based ratios entirely. That threshold was lowered from 9% to 8%, effective July 1, 2026. At 9.4%, Ridgeway could opt in, if it meets the other criteria.

Unrealized bond losses

Say rates rose, and Ridgeway's $1 billion of available-for-sale bonds is down $60 million. Banks under $100 billion could choose to filter that out of regulatory capital, so Ridgeway still reports 12%. If it counted, CET1 would be $732 million, or 11.1%. The 2026 proposal would make banks with $100 billion or more count most of these gains and losses. Smaller banks should still know their number, because the loss is real.

Where the United States stands

In 2023, the agencies proposed Basel III endgame rules that would have raised capital for large banks. On March 19, 2026, they re-proposed. The largest banks would use a new expanded approach. Everyone else gets a revised standardized approach. For example, corporate loans would drop from a 100% to a 95% weight. Fed staff estimate CET1 requirements would fall 7.8% for banks under $100 billion. Comments closed June 18, and as of mid-November 2026 the rules are still not final.

What would that mean for Ridgeway? Each billion dollars of corporate loans moved from 100% to 95% means $50 million less RWA. At a 10% capital target, that's $5 million less capital per billion. Or Ridgeway could opt into the community bank leverage ratio, and the risk weights stop mattering for its ratio.

Five questions to ask at ALCO

How far above the minimum plus buffer are we, for each ratio?
Which assets drive our risk-weighted assets?
Would the community bank leverage ratio be simpler for us?
How would the 2026 proposals change our RWA?
And how much capital would a bad year use up?

Recap

Capital is a loss cushion, not cash. The stack is CET1, then additional tier 1, then tier 2. The ratio is capital divided by risk-weighted assets. Remember four and a half, six, eight, then add the 2.5% buffer. And under $10 billion, there's the community bank leverage ratio, above 8%.

Watch more Bank Risk Decoded videos on the Bank Risk Decoded YouTube channel.