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Tier 1 Capital refers to the capital held in a bank's reserves. It is used to fund the business activities of the bank's clients.
This is used to measure a the financial strength of a bank, along with Tier 2 capital.
Under Basel III, the ratio is 6% of risk weighted assets.
Capital of this nature is:
- retained earnings
- common stock
- preferred stock
The idea is for the bank to be able to withstand large losses that threaten the stability of the financial institution.