Tier 1 Common Capital Ratio: Australian Banks 2025 Update

The stability of Australia’s financial system hinges on a handful of crucial metrics, and the Tier 1 Common Capital Ratio (CET1) sits at the top of that list. In 2025, with regulatory changes and global uncertainty, this capital benchmark is more relevant than ever. But what does it actually mean for banks, investors, and everyday Australians?

Understanding the Tier 1 Common Capital Ratio

The Tier 1 Common Capital Ratio is a key measure of a bank’s financial strength. In simple terms, it reflects the core equity capital (mainly ordinary shares and retained earnings) a bank holds, relative to its risk-weighted assets. The higher the ratio, the better equipped the bank is to absorb unexpected losses and protect depositors.

• Tier 1 capital: Core funds, mainly ordinary shares and retained profits
• Risk-weighted assets: Loans and investments adjusted for risk (e.g., mortgages, business loans)
• Ratio: Tier 1 capital divided by risk-weighted assets, shown as a percentage

For example, if a bank has $10 billion in Tier 1 capital and $100 billion in risk-weighted assets, its CET1 ratio is 10%.

2025 Regulatory Updates: APRA’s New Benchmarks

The Australian Prudential Regulation Authority (APRA) plays the watchdog role for our banks. In January 2025, APRA’s latest capital adequacy rules kicked in, following years of global consultation and lessons learned from recent banking crises abroad.

• Major banks: Must now maintain a minimum CET1 ratio of 11.0% (up from 10.5% in 2024)
• Smaller banks: Required CET1 ratio is now 8.5% (previously 8.0%)
• Extra capital buffers: Added for systemically important banks (e.g., CBA, Westpac, NAB, ANZ)

This tightening is designed to make sure Australian banks remain among the world’s safest, even if global markets wobble. The changes follow a string of international bank failures in 2023–24, making capital strength a non-negotiable for regulators and investors alike.

Why the CET1 Ratio Matters for Australians

It’s easy to think of capital ratios as just banker jargon. But the CET1 ratio affects almost everyone, whether you’re a saver, homebuyer, investor, or business owner:

• Deposit safety: A higher ratio means your money is better protected if a bank faces tough times.
• Lending standards: Banks with strong capital can keep lending even in downturns, supporting the economy and property market.
• Shareholder returns: Capital requirements may limit dividend payouts or share buybacks, but improve long-term stability.
• Interest rates: Tighter capital rules can nudge banks to pass some costs to borrowers, but also help avoid sudden shocks or bailouts.

In 2025, the Big Four banks reported CET1 ratios well above the new minimums—CBA led the pack at 12.3% in its latest half-year update, while smaller lenders like Bendigo and Suncorp also comfortably cleared the higher bar. This capital strength is one reason Australia’s banking sector continues to attract global confidence, even as overseas institutions face volatility.

Looking Ahead: How CET1 Will Shape Banking in 2025 and Beyond

Regulators and investors are watching CET1 ratios closely as mortgage stress, business insolvencies, and global economic headwinds all loom in 2025. Banks with healthy ratios can weather these storms, continue lending, and support Australia’s recovery.

Key trends to watch this year include:

• Capital management: Some banks may issue new shares or retain more earnings to stay ahead of regulatory requirements.
• Innovation vs. caution: While strong capital allows for innovation, it may also encourage a more cautious approach to risk.
• International comparisons: Australian banks’ CET1 ratios remain among the highest globally, which could attract more foreign investment.

Ultimately, the Tier 1 Common Capital Ratio is more than a number—it’s a signal of safety, trust, and resilience for the entire financial system.