What the ratio measures

The total capital ratio is the broadest of the risk-based capital ratios. It divides a bank's total own funds, the sum of common equity tier 1, additional tier 1 and tier 2 capital, by its total risk exposure amount, and expresses the result as a percentage. It sits alongside the CET1 ratio and the tier 1 ratio, differing only in which layers of own funds are counted in the numerator: the total capital ratio counts them all.

The framework sets a minimum total capital ratio of 8%. This is the headline Pillar 1 own funds requirement: a bank must hold total own funds of at least 8% of its risk-weighted exposures at all times. Within that 8%, quality sub-minima apply, so that at least 4.5% must be common equity tier 1 and at least 6% must be tier 1 capital, leaving up to 2 percentage points that may be filled with tier 2.

How it works in practice

The 8% total capital ratio is only the Pillar 1 floor. On top of it sit the Pillar 2 requirement and the combined buffer requirement, which together with Pillar 1 form the overall capital requirement. The total capital ratio therefore measures compliance with the base own funds requirement, while the buffers and Pillar 2 add-ons determine how much headroom a bank actually holds and when distribution restrictions apply.

The denominator, the total risk exposure amount, is the sum of a bank's risk-weighted assets for credit, market and operational risk and other prescribed components. Because own funds and the total risk exposure amount are the same building blocks used to express MREL and TLAC as risk-based percentages, the total capital ratio is closely related to the resolution requirements: MREL is set as a percentage of the same total risk exposure amount and is met partly with the same own funds instruments, with the combined buffer required on top.

The total capital ratio minimum is set in the CRR, Article 92(1)(c), which requires institutions to maintain a total capital ratio of 8%, alongside the common equity tier 1 ratio of 4.5% in Article 92(1)(a) and the tier 1 ratio of 6% in Article 92(1)(b). Own funds and their components are defined in the CRR, Articles 25 to 88, and the total risk exposure amount that forms the denominator is defined in the CRR, Article 92(3).

Practical relevance for banks and investors

For banks, the total capital ratio is the base own funds test that must be met continuously, and its composition rules determine how much tier 2 and additional tier 1 can substitute for common equity tier 1. For investors, the ratio is a standard measure of overall capitalisation, but its limits should be read alongside the CET1 ratio and the combined buffer, since it is CET1 depletion into the buffers, not the 8% total ratio alone, that governs distribution and coupon restrictions.