Capital ratios and the capital stack · RiskAtoms Academy

By the end you will be able to

1Calculate CET1, Tier 1 and total capital ratios and test them against the 4.5%, 6% and 8% minimums.
2Place the three pillars in the Basel Framework and say which one sets each layer of a bank's requirement.
3Build a UK bank's full capital stack: Pillar 1, Pillar 2A, the combined buffer and the headroom above it.
4Find which ratio binds and explain why CET1 headroom can be smaller than the CET1 surplus.

Why it matters

RiskAtoms Bank plc's equity is 6.0% of its assets. Its CET1 ratio is 13.24% and its total capital ratio 17.51%. Comfortable? The rules ask it to hold 15% of risk-weighted assets once Pillar 2A and the buffers are stacked on the minimum, which leaves £573.5m of room. One bad year of credit losses could use that up. This module shows where each layer comes from, starting with the stack as a whole.

Core explanation

Capital over risk-weighted assets, layer by layer

Three ratios, one denominator

L1.8.06: Capital, equity and leverage separated accounting equity from regulatory capital, and L2.7.02: The Basel Committee and Basel I built the first capital ratio. Basel III keeps the idea and asks for three capital ratios, all over the same risk-weighted assets:

Ratio	Numerator	Minimum (RBC20.1)	RiskAtoms Bank plc
CET1 ratio	Common Equity Tier 1	4.5%	13.24%
Tier 1 ratio	CET1 + Additional Tier 1	6%	14.99%
Total capital ratio	Tier 1 + Tier 2	8%	17.51%

The minimums nest. At least 4.5% must be the best capital, CET1; another 1.5 points may be Additional Tier 1 (AT1); and the last 2 points may be Tier 2. RBC20.1 says a bank must meet them at all times, not just at the quarter end. The numerator is the subject of L4.1.02: Common Equity Tier 1 and L4.1.03: Additional Tier 1 and Tier 2; the denominator, RWA, of L4.1.04: Risk-weighted assets.

The three pillars, in one table

L2.7.03: Basel II: three pillars introduced the pillars. In today's Basel Framework each has its own standards:

Pillar	What it does	Basel standards	Where in Level 4
1. Minimum capital	Formulas for RWA and the minimum ratios	RBC, CRE, MAR, OPE, LEV	M4.1: The Basel framework–M4.4: Counterparty, operational and large exposures
2. Supervisory review	The bank's own assessment and the supervisor's judgement, adding capital for risks Pillar 1 misses	SRP	L4.9.01: Pillar 2 and the SREP
3. Market discipline	Public disclosure, so investors can judge the bank's capital	DIS	L4.9.08: Pillar 3 disclosure

Pillar 1 gives the 8%. In the UK, Pillar 2 turns into two numbers: Pillar 2A, which the PRA adds to the minimum, and Pillar 2B, the PRA buffer, which sits on top of the other buffers. Pillar 1 plus Pillar 2A is the total capital requirement.

The book for this module

Illustrative dataRiskAtoms Bank plc's capital book

The same made-up UK bank as Level 3: £67bn of assets and £4bn of equity at 31 December 2025, in £ millions. Module 4.1 adds its regulatory layer: own funds, deductions, risk-weighted assets by risk type, buffers, the leverage exposure and MREL, computed from the Level 3 credit, trading, derivatives and operational risk books. Every figure is illustrative, not any bank's data.

Pro forma. The book applies Basel 3.1, the 2017 finalisation of Basel III, to the 31 December 2025 balance sheet. On that date the bank still reported under the old UK CRR. The UK applies Basel 3.1 from 1 January 2027, and the internal model approach for market risk from 1 January 2028 (PRA PS1/26, paras 1.23 and 1.24). So the book shows the bank as it would look under the new rules.

Every number in Module 4.1 comes from that book. Its headline figures, at 31 December 2025 and in £ millions:

Item	£m	% of RWA
Accounting equity (of which AT1 £400m)	4,000.0
Regulatory adjustments to CET1	−580.1
CET1	3,019.9	13.24%
Tier 1 (CET1 + AT1)	3,419.9	14.99%
Total capital (Tier 1 + Tier 2)	3,994.7	17.51%
RWA before the output floor	21,558.1
RWA after the output floor (72.5% of the standardised figure)	22,807.7

Stacking the requirement

Three layers sit on the RWA. Pillar 1 is 8%. Pillar 2A is set for each firm; the book uses an illustrative 2.5%, met at least 56.25% in CET1 and 75% in Tier 1. Then the combined buffer, all CET1: the conservation buffer of 2.5% and the UK countercyclical buffer of 2%. The bank has no systemic buffer; L4.1.05: Capital buffers shows why. Click any layer.

RiskAtoms Bank plc's capital stack, 31 December 2025

Show

Right-hand column

Pillar 1 CET14.50% of RWA · £1,026.3m

Pillar 1, met in CET1. RBC20.1. The hard floor. A bank below it is failing its minimum, and the supervisor acts at once.

Solid colours are Pillar 1, lighter Pillar 2A, faintest the buffers. CET1 blue, AT1 violet, Tier 2 amber, headroom green. RWA £22,807.7m, after the output floor. Illustrative data.

The requirement adds to 15% of RWA, £3,421.2m. The bank holds £3,994.7m, so its headroom is £573.5m. Switch the right-hand column to “CET1 by use” to see why the same figure appears on the CET1 side. The bank's £400m of AT1 is £49.0m short of its AT1 slice, and its Tier 2 is £23.9m short of its slice. CET1 can stand in for either, but every pound it lends to them is a pound not available for the buffers.

Why the order matters

What happens at each layer

The formal version

With $C_1$ for CET1, $A_1$ for AT1, $T_2$ for Tier 2 and RWA for risk-weighted assets after the output floor, the Pillar 1 minimums are (RBC20.1):

\begin{aligned} \frac{C_1}{\text{RWA}} &\ge 4.5\%, \qquad \frac{C_1 + A_1}{\text{RWA}} \ge 6\%, \qquad \frac{C_1 + A_1 + T_2}{\text{RWA}} \ge 8\% \end{aligned}

With Pillar 2A $P$ , met with shares $s_{C} = 56.25\%$ in CET1 and $s_{T1} = 75\%$ in Tier 1, and the combined buffer $B$ , all CET1, a UK bank stays clear of the buffers when all three hold:

\begin{aligned} \frac{C_1}{\text{RWA}} &\ge 4.5\% + s_C P + B \\ \frac{C_1 + A_1}{\text{RWA}} &\ge 6\% + s_{T1} P + B \\ \frac{C_1 + A_1 + T_2}{\text{RWA}} &\ge 8\% + P + B \end{aligned}

Each line puts $B$ on top because CET1 used to meet a minimum cannot also count towards a buffer (RBC30.2, footnote 1, and RBC30.4). The ratio with the least room is the one that binds.

On the book, with RWA of £22,807.7m:

\begin{aligned} \text{CET1:}\quad & 13.24\% - 10.41\% = 2.83\% &&\Rightarrow \text{£}646.5\text{m} \\ \text{Tier 1:}\quad & 14.99\% - 12.375\% = 2.62\% &&\Rightarrow \text{£}597.5\text{m} \\ \text{Total:}\quad & 17.51\% - 15\% = 2.51\% &&\Rightarrow \text{£}573.5\text{m} \end{aligned}

Total capital binds: £573.5m, equal to the MDA headroom in the book (£573.5m), because CET1 fills both the AT1 and the Tier 2 gap.

Try it

Change the bank's capital, its RWA or its Pillar 2A. Which ratio binds when you add £300m of AT1? What happens to all three ratios if RWA rise by a fifth with no new capital?

Try itCheck the three ratios

CET1£3,020m

AT1£400m

Tier 2£575m

Risk-weighted assets£22,808m

Pillar 2A2.50%

CET113.24% needs 10.41%

Pillar 1 4.5% · with 2A 5.91% · with buffers 10.41% · clear of the buffers: room £646.5m

Tier 114.99% needs 12.38%

Pillar 1 6.0% · with 2A 7.88% · with buffers 12.38% · clear of the buffers: room £597.5m

Total capital17.51% needs 15.00%

Pillar 1 8.0% · with 2A 10.50% · with buffers 15.00% · clear of the buffers: room £573.5m

Ratio with least roomTotal capital

Room above its full requirement£573.5m

Solid line: Pillar 1 (4.5%, 6%, 8%). Dashed: plus Pillar 2A, met at least 56.25% in CET1 and 75% in Tier 1. Red: plus the combined buffer of 4.5%, which must be CET1 on top of everything else. Capital in £ millions; illustrative.

Worked example

Building the stack in pounds

All figures from the book, £ millions, RWA 22,807.7.

RiskAtoms Bank plc's requirement, layer by layer

Step 1 of 5

1
Pillar 1 in pounds
$\begin{aligned} \text{CET1} &: 4.5\% \times 22{,}807.7 = 1{,}026.3 \\ \text{Tier 1} &: 6\% \times 22{,}807.7 = 1{,}368.5 \\ \text{Total} &: 8\% \times 22{,}807.7 = 1{,}824.6 \end{aligned}$

Regulatory lens

The base is the Basel Framework: RBC20 for the minimums and the output floor, RBC30 for the buffers. The UK, EU and US write them into their own law, with differences. L4.1.08: Basel 3.1 from 2027: UK, EU and US compares the three.

In the UK

The same 4.5%, 6% and 8% sit in Article 92(1) of the PRA Rulebook's Required Level of Own Funds (CRR) Part. From 1 January 2027 that Part adds the output floor, phased in at 60% in 2027, 65% in 2028 and 70% in 2029 before 72.5% (Article 92(2A) and (5)). The PRA sets Pillar 2A and the PRA buffer for each firm; its model requirement asks for at least 56.25% of Pillar 2A in CET1 and no more than 25% in Tier 2. Firms treat the PRA buffer as confidential (SS31/15, 5.37), which is why the book leaves it out.

In the US

The agencies' rules set the same three minimums (12 CFR 217.10(a)(1)) plus a 4% leverage ratio. For bank holding companies with $100 billion or more of assets the conservation buffer is replaced by a stress capital buffer set from the Federal Reserve's stress test, at least 2.5% (12 CFR 217.11 and 225.8). Stress tests are in M4.9: Supervision, stress testing and disclosure.

Spark Atoms

Spark AtomSix per cent equity, thirteen per cent CET1

RiskAtoms Bank plc's equity is 6.0% of its £67bn of assets, but its RWA are only 34% of those assets. Half the balance sheet is mortgages and cash with low risk weights. Dividing a smaller capital figure by a much smaller denominator gives a ratio more than twice the plain equity share. L4.1.06: The leverage ratio shows the backstop that ignores risk weights.

Spark AtomThe floor costs the bank three-quarters of a point

Before the output floor the bank's RWA are £21,558.1m and its CET1 ratio would be 14.01%. The floor lifts RWA to £22,807.7m and the ratio falls to 13.24%, with no change in capital. L4.1.04: Risk-weighted assets explains why it binds.

Key takeaways

Capital ratios divide CET1, Tier 1 and total capital by the same RWA. Pillar 1 asks for 4.5%, 6% and 8% at all times (RBC20.1).
Pillar 1 is formula, Pillar 2 is supervisory judgement, Pillar 3 is disclosure. In the UK, Pillar 2A joins the minimum and the PRA buffer sits on top.
RiskAtoms Bank plc's stack is 8% + 2.5% Pillar 2A + 4.5% combined buffer = 15% of RWA, £3,421.2m.
Its CET1 ratio is 13.24% against a CET1 line of 10.41%, but total capital binds: headroom £573.5m.
Buffers are CET1 on top of every minimum. CET1 that fills an AT1 or Tier 2 gap cannot also fill a buffer.
The book is pro forma: Basel 3.1 on the 31 December 2025 balance sheet; the UK applies it from 1 January 2027.

Reaction

Check what stuck

Question 1 · objective 1

A bank has CET1 of £6bn and risk-weighted assets of £50bn. What is its CET1 ratio, in %?

%

Question 2 · objective 1

RiskAtoms Bank plc's RWA are £22,807.7m. What total capital does Pillar 1 alone require, in £m?

£m

Question 3 · objective 2

Under which pillar does the PRA set a bank's Pillar 2A?

APillar 2, the supervisory review: the supervisor's judgement of risks the formulas missBPillar 1, as part of the formula every bank appliesCPillar 3, through the bank's public disclosuresDNone: it is a buffer the bank chooses for itself

Question 4 · objective 3

A UK bank has Pillar 2A of 3%, the 2.5% conservation buffer and a 2% countercyclical buffer. Pillar 2A is met 56.25% in CET1. What CET1 ratio must it keep to stay out of the buffers, in %?

%

Question 5 · objective 4

RiskAtoms Bank plc's CET1 ratio is 13.24% against a CET1 line of 10.41%: 2.83% apart. Yet its headroom is only 2.51%. Why?

AIts AT1 and Tier 2 are smaller than their slices of the requirement, so some CET1 is used to fill those gapsBThe countercyclical buffer is counted twiceCThe output floor is deducted from CET1DAT1 coupons are paid out of CET1 before the ratio is measured

Glossary

Capital ratio: Capital divided by risk-weighted assets. Basel sets three: CET1, Tier 1 and total capital.
Risk-weighted assets: Risk-weighted assets: every exposure weighted by its risk, plus 12.5 times the capital charges for market, CVA and operational risk.
Pillar 1: The minimum capital every bank must hold at all times, by formula: 4.5% of RWA in CET1, 6% in Tier 1, 8% in total (RBC20.1).
Pillar 2A: In the UK, firm-specific capital the PRA sets for risks not captured, or not fully captured, by Pillar 1, such as interest rate risk in the banking book and concentration risk (SS31/15, 5.10). Part of the minimum, not a buffer.
PRA buffer (Pillar 2B): The PRA buffer: firm-specific capital so the bank can still meet its minimum in a stress, on top of the combined buffer. Firms treat it as confidential (SS31/15, 5.37), and the book does not model it.
Total capital requirement: Total capital requirement: Pillar 1 plus Pillar 2A. Breaching it is a breach of the minimum.
Conservation buffer: Capital conservation buffer: 2.5% of RWA in CET1 above the minimum, for every bank (RBC30.2).
Countercyclical buffer: Countercyclical buffer: 0% to 2.5% of RWA in CET1, set by each country's authority to grow in booms and be released in busts (RBC30.9).
Combined buffer: Combined buffer requirement: the conservation, countercyclical and systemic buffers added together, all in CET1.
Maximum distributable amount: Maximum distributable amount: the cap on dividends, buybacks, AT1 coupons and bonuses once CET1 falls into the combined buffer.
Headroom: Capital above everything the bank is required to hold, minimum and buffers together.
Pro forma: Shown as if a rule already applied. The book applies Basel 3.1 to a date when the old rules were still in force.

Deep Dives & Origins

Deep Dives

Basel Committee on Banking Supervision, The Basel Framework, bis.org: the consolidated standards, chapter by chapter. Start with RBC20 and RBC30. Intermediate.
Prudential Regulation Authority, “The Pillar 2 framework: background”, July 2015: why Pillar 2A exists and how it is met. Introductory.

Origins

Basel Committee on Banking Supervision, RBC20: Calculation of minimum risk-based capital requirements, paras 20.1 and 20.4 (version effective 1 January 2023, published 26 November 2020), bis.org.
Basel Committee on Banking Supervision, RBC30: Buffers above the regulatory minimum, paras 30.2, 30.4 and 30.9 (version effective 15 December 2019), bis.org.
Basel Committee on Banking Supervision, The Basel Framework, list of standards (SCO to BCP), bis.org.
Prudential Regulation Authority, PRA Rulebook, Required Level of Own Funds (CRR) Part, Article 92(1), (2A) and (5), version in force from 1 January 2027.
Prudential Regulation Authority, Capital buffers and Pillar 2A model voluntary requirement, December 2020, para 2.2.
Prudential Regulation Authority, PS1/26 Implementation of Basel 3.1: Final rules, 20 January 2026, paras 1.23 and 1.24.
Bank of England, Financial Policy Committee Record, December 2025, para 53 (UK CCyB held at 2%).
Prudential Regulation Authority, SS31/15 The ICAAP and the SREP, April 2021 update (since superseded), paras 5.10 and 5.37.
Prudential Regulation Authority, “The Pillar 2 framework: background”, July 2015.
US Code of Federal Regulations, 12 CFR 217.10, 217.11 and 225.8, eCFR, as at 22 October 2026.

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