What does the Tier 1 capital requirement measure?

The Tier 1 capital requirement specifically measures a bank's core equity capital in relation to its total risk-weighted assets. This metric is crucial as it helps assess the financial strength and stability of a bank. Core equity capital typically includes the bank's common equity, retained earnings, and certain other qualifying instruments.

By comparing this core equity capital to the risk-weighted assets, regulators can gauge whether a bank has a solid capital buffer to absorb losses, ensuring that it can meet its obligations and continue operating effectively, even during economic downturns. A high Tier 1 capital ratio indicates a strong position and promotes confidence among depositors and investors regarding the bank's ability to withstand financial stresses.

Other options do not accurately reflect the purpose of the Tier 1 capital requirement. For instance, measuring total deposits or the number of loans issued does not provide insight into a bank's ability to cover potential risks related to its asset base, while consumer satisfaction is unrelated to capital adequacy or financial health.