Academic journal article ABA Banking Journal

Tier 1 Ratios: Stable So Far

Academic journal article ABA Banking Journal

Tier 1 Ratios: Stable So Far

Article excerpt

As metrics go the Tier 1 ratio is one the most important in banking. The ratio takes the amount of Tier 1 capital--typically common and some types of preferred equity plus retained earnings--and expresses it as a percentage of risk-adjusted assets. For a bank to be considered well capitalized the metric must be above 6%. Going below 4% draws immediate reaction from the regulators.

In the current environment this metric has been garnering quite a bit of attention as the money center banks have been feeling a significant pinch. Citigroup, for example, has seen its Tier 1 ratio fall from 9.12%, to 8.64% to 7.32% in the third quarters of 2005, 2006 and 2007 respectively.

The broad industry trend, however, suggests that while these large banks have had some trouble, publicly traded banks overall have fared rather well. The chart shows that the average Tier 1 ratio is stronger now than it was in 2002 through 2004; the median is only slightly below levels during that time and both are well above the danger zone. …

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