DEFINITION of Tier 1 capital
Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It consists of the types of capital considered the most reliable and liquid, primarily equity. Examples of Tier 1 capital are common stock, preferred stock that is irredeemable and non-cumulative, and retained earnings.
The theoretical reason for holding capital is that it should provide protection against unexpected losses. Note that this is not the same as expected losses-- provisions and reserves are for expected losses.
Additional meaning of Tier 1 capital: