Explanation:
Under Basel III, Core Tier 1 Capital (CET1) includes Common Equity and Retained Earnings, minus regulatory adjustments such as Goodwill.
First, calculate the CET1 Capital: CET1 Capital = Common equity + Retained earnings - Goodwill CET1 Capital = 2,010 + 3,210 - 850 = 4,370 million EUR.
Note: Non-callable preferred equity is considered Additional Tier 1 (AT1) capital, and Subordinated debt is Tier 2 capital, so neither is included in CET1.
Next, calculate the CET1 Ratio: CET1 Ratio = CET1 Capital / Risk-Weighted Assets (RWA) CET1 Ratio = 4,370 / 49,700 = 0.087927... or 8.79%.
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| Item | Value (EUR millions) |
|---|---|
| Common equity | 2,010 |
| Non-callable preferred equity | 500 |
| Subordinated debt | 1,500 |
| Retained earnings | 3,210 |
| Goodwill from prior acquisitions | 850 |
The bank has total risk-weighted assets of EUR 49,700 million. What is the correct ratio of Core Tier 1 Capital to risk-weighted assets (the CET1 ratio) that the analyst should calculate for the bank?
A
8.79%
B
9.80%
C
10.50%
D
11.51%