Definition:

Total Common Equity Tier 1 (CET1) refers to the core capital that a bank holds, which includes common shares, retained earnings, and other comprehensive income. It is a key measure of a bank's financial strength and stability, as it represents the highest quality of capital that can absorb losses immediately when they occur.

Formula:

CET1 = Common Shares + Retained Earnings + Other Comprehensive Income - Regulatory Adjustments

How to use the metric:

CET1 is used by regulators and investors to assess a bank's capital adequacy. It is a critical component of the Basel III framework, which requires banks to maintain a minimum CET1 ratio to ensure they can withstand financial stress and continue operations without requiring external assistance.

Limitations:

CET1 does not account for the risk profile of a bank's assets, meaning it does not provide a complete picture of a bank's risk exposure. Additionally, regulatory adjustments can vary between jurisdictions, potentially leading to inconsistencies in CET1 calculations across different banks.

Applies to:

CET1 is primarily applicable to the banking and financial services industry, where capital adequacy is a crucial measure of financial health and regulatory compliance.

Doesn't apply to:

CET1 does not apply to non-financial industries, such as manufacturing or retail, because these sectors are not subject to the same capital adequacy requirements and regulatory frameworks as banks.

Summary:

Total Common Equity Tier 1 (CET1) is a vital measure of a bank's core capital strength, used to evaluate its ability to absorb losses and maintain financial stability. While it is essential for assessing capital adequacy in the banking sector, it does not provide a complete risk assessment and is not applicable to non-financial industries.