What is tier 1 capital?
Tier 1 capital is money that a bank must keep on hand, here expressed as a percentage of overall assets. This ratio is important because banks do not hold their total assets in their vault. Instead, they issue loans for which they can charge interest. The capital that they keep on hand is a buffer to ensure that they can cover any demands for withdrawals.
Preventing a bank run
If a large share of depositors request money at the same time, the bank may have trouble repaying them all immediately. This is called a bank run and can lead to bank failures, like those in 1930 and 1931. Fortunately, Deutsche Bank can rely on the European Central Bank’s marginal lending facility for overnight loans in case of a run on deposits. However, with a robust tier 1 capital ratio, the need for overnight loans should be minimal.