Tier 1 Capital Ratio in Australia 2025: What It Means for Banks & Your Money

When you hear about the financial strength of Australian banks, the ‘Tier 1 capital ratio’ often sits front and centre. But what is it, why does it matter in 2025, and how could it affect your savings or investments? Let’s pull back the curtain on this critical banking metric and see what’s changed in Australia’s financial landscape this year.

Understanding the Tier 1 Capital Ratio

The Tier 1 capital ratio is a key measure of a bank’s core financial strength from a regulator’s perspective. It’s calculated by dividing a bank’s core equity capital by its total risk-weighted assets. In simple terms, it tells us how much high-quality capital a bank has to absorb potential losses while continuing to operate—vital during periods of economic stress.

• Core capital includes: Common shares, disclosed reserves, and retained earnings.
• Risk-weighted assets: Loans and investments, adjusted for risk (e.g., home loans are less risky than unsecured credit).

For example, if a bank has $10 billion in Tier 1 capital and $100 billion in risk-weighted assets, its Tier 1 capital ratio is 10%.

2025 Policy Updates: APRA’s Tougher Stance

This year, the Australian Prudential Regulation Authority (APRA) further tightened its expectations for bank capital, in response to global economic volatility and lessons from recent international bank failures. As of January 2025, APRA requires Australia’s major banks to maintain a minimum Tier 1 capital ratio of 11.5%, up from 10.5% in previous years. This shift aligns with global Basel III reforms and aims to ensure our financial system remains among the world’s safest.

Key 2025 updates include:

• Higher capital buffers: Major banks must hold extra capital to protect against systemic shocks, such as a housing downturn or global credit crunch.
• Stricter risk-weightings: APRA has recalibrated risk weights for mortgage portfolios, especially for interest-only and high loan-to-value loans.
• Transparency: Banks must now publish quarterly updates on their Tier 1 ratios, making it easier for customers and investors to gauge their resilience.

For context, in March 2025, Commonwealth Bank and Westpac both reported Tier 1 ratios above 12%, well above the new minimum, reflecting their robust capital management and conservative lending standards.

Why Should Everyday Australians Care?

The Tier 1 capital ratio isn’t just an abstract number for regulators—it underpins the safety of your deposits, the stability of your home loan provider, and the confidence of international investors in Australia’s financial system.

• Deposit safety: A higher Tier 1 ratio means your bank is more likely to withstand economic shocks and protect your savings.
• Borrowing costs: Banks with strong capital positions can access funding at lower costs, potentially keeping mortgage and business loan rates more competitive.
• Investor confidence: Global investors view high Tier 1 ratios as a sign of strength, which keeps Australia attractive for capital flows.

Real-world example: During the global banking jitters of late 2024, Australian banks’ high Tier 1 ratios helped them avoid the turmoil seen in the US and Europe, with no major disruptions to lending or withdrawals.

Looking Ahead: Tier 1 Ratios and the Future of Australian Banking

As digital banking, climate risks, and global market volatility reshape the financial sector, expect the Tier 1 capital ratio to remain a central focus. APRA is already signalling further reviews in 2026, particularly around climate-related lending risks and fintech competition.

For consumers, this means Australia’s banks will continue to operate with a high degree of caution, even as they innovate with new products and technology. The Tier 1 capital ratio will serve as a “safety net”—protecting both the financial system and your hard-earned money.