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What is a tier 1 bank?

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Quick Answer

A tier 1 bank refers to a bank’s core capital, and a tier 2 bank refers to a bank’s supplementary capital, explains Investopedia. A bank’s retained earnings and shareholders’ equity determines tier 1 capital.

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Analysts use tier 1 capital to determine the financial health of banks, according to Investopedia. The minimum ratio for tier 1 capital is 6 percent, and the formula used to calculate the ratio is to divide the total tier 1 capital by the bank’s total risk-based assets. The ratio for tier 1 capital falls under the Basel Accord, which is an agreement set forth by the Basel Committee on Bank Supervision. The BCBS provides recommendations regarding capital risk.

As of 2015, JPMorgan Chase Bank ranks first in tier 1 core risk-based capital, with nearly $162 billion, reports USBankLocations.com. Bank of America ranks second, with $144.5 billion; Citibank ranks third, with $129 billion; and Wells Fargo ranks fourth, with $122.8 billion. Other well-known banks in the top 10 of tier 1 risk-based capital include U.S. Bank, HSBC Bank, Capital One and Goldman Sachs Bank. Banks place a considerable amount of significance on tier 1 capital in an effort to meet Basel III compliance, explains Forbes. Tighter regulatory oversight affects a bank’s balance sheet and its dividend payments.

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