Tier-1 capital ratio banking sector

EU banking rules require banks to maintain enough capital to cover unexpected losses, which are driven by the risks banks have on their books. In the CBD2 dataset, the aggregate Tier 1 ratio shows the relationship between aggregate Tier 1 capital and aggregate risk-weighted assets of a banking system. Tier 1 capital provides loss absorption on a going-concern basis. It consists of the sum of the Common Equity Tier 1 (CET1) capital and Additional Tier 1 (AT1) capital. CET1 capital is the highest quality of capital as defined by banking law, as it absorbs losses immediately when they occur. It typically includes shares, retained earnings and other reserves. Some debt instruments, such as perpetual contingent convertible capital instruments, may be included in AT1 but not in CET1. Risk-weighted assets are a measure of the risks the banks have on their books. The higher the Tier 1 ratio, the better the loss absorption capacity on a going-concern basis.