Bank Capital and Liquidity Glossary: CET1, LCR, NSFR and Basel
Banks can look profitable and yet be vulnerable to losses or funding withdrawals. Prudential terminology separates capital strength, liquid asset buffers, stable financing and asset quality. The relevant regulatory definitions change across jurisdictions and reporting periods, so this glossary explains the economic purpose of key measures rather than treating one threshold as proof of safety.
Key terminology at a glance
The definitions below separate the meaning of each term from the practical mistake it helps avoid. Exact calculations and legal rules may vary by market, product and data provider.
Common Equity Tier 1 (CET1)
A high-quality category of regulatory capital broadly comprising eligible ordinary equity and retained earnings after specified prudential deductions.
Why it matters: Its purpose is to absorb losses while a bank continues operating; reported CET1 capital is not the same as cash in a vault.
Risk-weighted assets (RWA)
An exposure measure applying prescribed risk weights or model-based calculations to assets and relevant off-balance-sheet commitments.
Why it matters: Two banks with the same balance-sheet assets can have different RWA because the underlying risk mix and calculation approaches differ.
CET1 ratio
Eligible CET1 capital divided by risk-weighted assets, expressed as a percentage.
Why it matters: A rising ratio can reflect new equity, retained profits or a reduction in measured RWA; investigate what changed.
Tier 1 capital
An aggregate capital category including CET1 and eligible Additional Tier 1 instruments.
Why it matters: It is broader than CET1 and may contain instruments with different loss-absorption features.
Additional Tier 1 (AT1)
Certain regulatory capital instruments, often contingent instruments that can absorb losses by write-down or conversion under contract and regulatory conditions.
Why it matters: Their risk, coupons and triggers are different from ordinary senior bonds; legal terms matter.
Total capital ratio
Eligible total regulatory capital, including qualifying Tier 2, divided by RWA.
Why it matters: This ratio measures a different capital stack from CET1 and should not be substituted for it.
Leverage ratio
A non-risk-weighted capital measure comparing relevant Tier 1 capital with a defined exposure denominator, including certain off-balance-sheet items.
Why it matters: It serves as a backstop where risk weights underestimate risk and is not identical to debt divided by equity.
Capital conservation buffer
A prescribed capital layer above minimum requirements designed to support resilience and constrain certain distributions as buffers are depleted.
Why it matters: Buffer frameworks differ across countries and firms; a buffer breach does not automatically equal insolvency.
Countercyclical capital buffer (CCyB)
A macroprudential buffer intended to increase banking resilience during periods of elevated system-wide risks.
Why it matters: The rate can be raised or released by relevant authorities, changing the capital requirement rather than the current stock of loans mechanically.
High-quality liquid assets (HQLA)
Eligible assets with characteristics that make them usable to meet liquidity needs under stress, subject to regulatory criteria and haircuts.
Why it matters: Not all government bonds or cash-like claims qualify at full value in every jurisdiction.
Liquidity Coverage Ratio (LCR)
A ratio of eligible HQLA to modelled net cash outflows over a prescribed 30-day stress scenario.
Why it matters: A ratio of 120% means the eligible stock is 1.2 times the specified modelled net outflows, not that the bank is immune to a run.
Net Stable Funding Ratio (NSFR)
Available stable funding relative to required stable funding over an approximate one-year structural horizon.
Why it matters: It addresses sustained funding mismatches rather than only the immediate 30-day cash shock measured by the LCR.
Non-performing loan (NPL)
A credit exposure classified as non-performing under specified rules, often based on arrears or unlikely-to-pay assessments.
Why it matters: Definitions vary and published NPL ratios must be compared on a common accounting and regulatory basis.
Expected credit loss (ECL)
An accounting estimate of future credit losses using probability-weighted scenarios and accounting standards such as IFRS 9.
Why it matters: An ECL allowance is a modelled estimate, not an observed cash loss or a regulatory capital ratio.
Worked example: CET1 and LCR measure different things
A hypothetical bank has £15 billion of eligible CET1 capital and £100 billion in risk-weighted assets. Its CET1 ratio is 15%. That tells us about regulatory capital relative to risk-weighted exposures, not how much sterling cash is available for customers who withdraw deposits tomorrow.
Assume the same bank has £40 billion of eligible HQLA and modelled 30-day net outflows of £32 billion. Under simplified assumptions its liquidity coverage ratio is 40/32 = 125%. These two ratios are independent dimensions, and both should be considered alongside asset quality, funding and stress-test results.
If RWA rises by 20% to £120 billion while CET1 stays at £15 billion, the CET1 ratio falls to 12.5%, even with no immediate cash movement. This illustrates why analysts must understand the denominator and the source of ratio changes.
Comparison and worked calculations
| Metric | Illustrative calculation | Risk dimension |
|---|---|---|
| CET1 ratio | £15bn / £100bn = 15% | Loss-absorbing capital relative to RWA |
| LCR | £40bn / £32bn = 125% | 30-day stressed liquidity |
| CET1 ratio after RWA rises | £15bn / £120bn = 12.5% | Sensitivity to risk exposure |
| NSFR | Available / required stable funding | One-year funding resilience |
All numerical values and scenarios are hypothetical illustrations rather than actual market prices, forecasts or investment outcomes.
Common interpretation mistakes
- A bank with a strong CET1 ratio can still suffer a severe funding run or a market-value loss.
- Capital ratios are not directly comparable unless risk-weight methodologies, consolidation and deductions align.
- Do not confuse the LCR’s modelled net outflows with all deposits payable on demand.
- Read the regulatory vintage and entity-specific disclosures before drawing cross-border comparisons.
Frequently asked questions
Is CET1 capital the same as liquidity?
No. CET1 is loss-absorbing regulatory capital; liquidity is the ability to meet payments when due.
Can a high LCR guarantee a bank will not fail?
No. Actual outflows, solvency issues and operational problems may differ from the modelled stress.
Why can CET1 ratios improve without new equity?
RWA can decline, profits can be retained or regulatory adjustments can change eligible capital.
Is the NSFR a short-term liquidity ratio?
It addresses structural funding stability over a roughly one-year horizon, unlike the LCR’s 30-day scenario.
Authoritative references and further reading
- Bank of England — Definitions of Regulatory Capital
- Bank of England PRA — Banking Resilience Report 2025/26
Continue learning: Liquidity versus solvency explained and Collateral and margin spirals.
This guide provides financial education only, not personal financial advice, investment recommendations or trading signals. All instruments carry risks including potential loss.