Answer: To qualify as common shares that may be used for Common Equity Tier 1 capital, investors of the shares must have a residual claim to the assets.

## Explanation Let's analyze each option: **Option A**: Incorrect. The Common Equity Tier 1 (CET1) capital requirement under Basel III is 4.5% of risk-weighted assets, not 6%. The 6% figure refers to the Tier 1 capital requirement (which includes CET1 plus additional Tier 1 capital). **Option B**: Incorrect. Preferred stock is NOT part of Common Equity Tier 1 capital. CET1 consists primarily of common shares, retained earnings, and other comprehensive income. Preferred stock is classified as Additional Tier 1 capital, not CET1. **Option C**: Incorrect. Common Equity Tier 1 capital actually has the MOST stringent requirements for what constitutes capital. It represents the highest quality capital that can absorb losses on a going-concern basis. **Option D**: **CORRECT**. For shares to qualify as Common Equity Tier 1 capital, investors must have a residual claim to the assets. This means common shareholders are the last to be paid in liquidation, which makes this capital truly loss-absorbing. This is a fundamental characteristic of common equity that distinguishes it from other forms of capital. **Key Points**: - CET1 is the highest quality capital under Basel III - It consists primarily of common shares and retained earnings - Investors must have residual claim status - CET1 requirement is 4.5% of risk-weighted assets - Preferred stock belongs to Additional Tier 1 capital, not CET1

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