Common Equity Tier 1 (CET1): The Backbone of Australian Bank Stability in 2025

Common Equity Tier 1 (CET1) might sound like an arcane banking term, but in 2025, it’s front and centre in shaping the financial resilience of Australian banks—and by extension, the security of your savings, mortgages, and investments. As regulatory settings evolve and global economic volatility remains a reality, understanding CET1 isn’t just for finance nerds. It’s essential knowledge for anyone who relies on Australia’s robust banking sector.

What is CET1? The Foundation of Financial Stability

CET1 is the highest-quality capital a bank can hold. It primarily includes ordinary shares and retained earnings—funds that are truly available to absorb losses in a crisis. Unlike other forms of capital (like subordinated debt or hybrid securities), CET1 capital is permanent and unrestricted.

• Ordinary shares: The basic equity issued by the bank, owned by shareholders.

• Retained earnings: Profits that are kept in the business rather than paid out as dividends.

• Other comprehensive income: Certain reserves and adjustments, as defined by APRA (Australian Prudential Regulation Authority).

APRA, Australia’s banking regulator, uses CET1 as the key measure of a bank’s core strength. The higher the CET1 ratio, the better a bank’s ability to withstand unexpected losses and continue lending during tough times.

2025 Regulatory Updates: CET1 in the Spotlight

Australia’s CET1 requirements aren’t static. In 2025, APRA’s latest Basel III reforms are fully implemented, with a focus on ensuring our banks remain among the world’s safest. Here’s what’s changed:

• Higher CET1 minimums: As of January 2025, major Australian banks must maintain a CET1 ratio of at least 11%, up from the previous 10.5%. This includes a capital conservation buffer and a domestic systemically important bank (D-SIB) surcharge.

• Stricter risk-weighted asset calculations: APRA has fine-tuned how banks assess the riskiness of their loans and investments. This affects the denominator in the CET1 ratio, often making it harder to maintain high ratios without raising fresh capital.

• Enhanced public disclosures: Banks must now provide clearer, more frequent updates on their CET1 position, making it easier for investors and customers to gauge financial health.

For example, in the most recent APRA data release (Q1 2025), Australia’s four major banks all reported CET1 ratios above 12%, reflecting the sector’s conservative approach and the lessons learned from global banking shocks in recent years.

Why CET1 Matters to Everyday Australians

While CET1 might seem like a technical metric, its impact is anything but abstract. Here’s how it touches your daily life:

• Depositor protection: A high CET1 ratio means your bank is better equipped to weather downturns, reducing the risk of failure and protecting your deposits beyond the government’s $250,000 guarantee.

• Mortgage and business lending: Strong capital buffers allow banks to keep lending—even in uncertain times—supporting homebuyers, small businesses, and economic growth.

• Investment confidence: Investors and ratings agencies closely watch CET1 ratios. A strong capital position keeps funding costs low, which can translate to better rates and services for customers.

Consider the COVID-19 pandemic: Australian banks’ robust CET1 positions allowed them to grant mortgage deferrals, maintain credit flows, and avoid the failures seen overseas. With geopolitical tensions and inflation remaining live risks in 2025, CET1 is your silent financial bodyguard.

How Banks Manage and Build Their CET1 Buffers

Banks constantly balance profitability, shareholder returns, and regulatory compliance. Key strategies for maintaining strong CET1 ratios in 2025 include:

• Retaining earnings: By moderating dividend payouts, banks can boost their core capital without raising new equity.

• Issuing new shares: When needed, banks may tap investors for fresh capital—though this can dilute existing shareholders.

• Optimising risk-weighted assets: Banks may shift their lending mix or tighten credit criteria to reduce the risk profile of their portfolios, supporting their CET1 ratios.

• Cost discipline: Operating efficiency helps ensure more profit drops to the bottom line, growing retained earnings and capital buffers.

For instance, in 2024–2025, some banks trimmed bonuses and discretionary spending to shore up their capital positions ahead of the new regulatory benchmarks.

The Road Ahead: CET1 and Your Financial Future

As Australian banking regulation evolves, CET1 will remain the gold standard for measuring financial strength. Whether you’re a homeowner, business owner, or saver, understanding CET1 empowers you to ask smarter questions about your bank’s stability and the safety of your money.