Published April 5, 2026 · Updated monthly
Bank Capital Ratios Explained in Plain English
A bank capital ratio measures how much of a bank's own money backs up the loans and investments it makes. The Tier 1 capital ratio is the most important — it tells you what percentage of a bank's risk-weighted assets is covered by core equity. A higher ratio means the bank can absorb more losses before your deposits are at risk.
What Is Capital in Banking?
Bank capital is the bank's own money — the difference between what the bank owns (assets) and what it owes (liabilities like your deposits). Think of it as the bank's equity cushion. If a bank has $100 in assets and $90 in deposits, its capital is $10. That $10 absorbs losses before depositors are affected.
Regulators care about capital because banks use your deposits to make loans. If those loans go bad, capital is what protects your money. More capital means more protection.
The Key Ratios
Tier 1 Capital Ratio
This is the gold standard metric. Tier 1 capital includes common stock, retained earnings, and disclosed reserves — the highest quality capital that can absorb losses immediately. The ratio divides Tier 1 capital by risk-weighted assets (assets adjusted for how risky they are — a Treasury bond counts for less than a commercial real estate loan).
Tier 1 Capital Ratio = Tier 1 Capital / Risk-Weighted Assets
- Below 6%: Undercapitalized (regulatory action required)
- 6-8%: Adequately capitalized
- 8-10%: Well-capitalized (FDIC minimum for "well-capitalized" is 8%)
- 10-15%: Strong
- Above 15%: Excellent
Leverage Ratio
Simpler than the Tier 1 ratio — it divides Tier 1 capital by total assets without risk-weighting. This catches banks that might look good on risk-weighted measures but are actually thin on capital relative to their overall size. A healthy leverage ratio is above 5%.
Total Capital Ratio
Includes Tier 1 plus Tier 2 capital (subordinated debt, loan loss reserves). Tier 2 capital is lower quality — it can absorb losses but not as directly. The regulatory minimum for total capital ratio is 10%.
Real Examples
Here is how these ratios look for actual banks in our database:
Well-Capitalized Banks
| Bank | Tier 1 Ratio | Health Score | Grade |
|---|---|---|---|
| FIRST SECURITY BANK WEST | 28.7% | 100 | A |
| FREDERICK COMMUNITY BANK THE | 18.2% | 100 | A |
| WELCOME STATE BANK | 18.8% | 100 | A |
Lower-Capitalized Banks
| Bank | Tier 1 Ratio | Health Score | Grade |
|---|---|---|---|
| KENTLAND FS&LA | 0.0% | 3 | F |
| TRIAD BANK NATIONAL ASSN | 0.0% | 10 | F |
| SNB BANK NATIONAL ASSN | 0.0% | 13 | F |
Why Capital Ratios Alone Are Not Enough
A high capital ratio is necessary but not sufficient for bank safety. Our Bank Health Score also considers loan quality (nonperforming loans), liquidity (ability to meet withdrawals), and profitability (return on assets). A bank could have excellent capital but deteriorating loan quality — meaning losses are coming that will eat into that capital.
That is why we weigh Tier 1 capital at 35% of the total score, not 100%. Look at the full picture by checking your bank's complete profile on BankHealth.
Frequently Asked Questions
A Tier 1 capital ratio above 10% is considered strong. The FDIC classifies banks as "well-capitalized" at 8% or above, "adequately capitalized" at 6-8%, and "undercapitalized" below 6%. The healthiest banks in our database maintain ratios of 15-25%.
Tier 1 capital is the highest quality — common stock, retained earnings, and disclosed reserves that can absorb losses immediately. Tier 2 capital includes subordinated debt and loan loss reserves — it provides a secondary buffer but cannot absorb losses as quickly. Regulators require banks to have minimum levels of both.
Silicon Valley Bank actually had adequate capital ratios by regulatory standards. Its failure in March 2023 was driven by a liquidity crisis (concentrated depositor base withdrew rapidly) and unrealized losses on bond holdings — illustrating why capital ratios alone are not sufficient to assess bank safety.
/methodology