portion of the allowance for loan and lease losses. see 12 cfr part 225, appendix a for a full discussion of the items included in tier 2 capital and the associated limits, restrictions and deductions. tier 1 common capital as defined for the supervisory capital assessment program is the portion of tier 1 capital that is common equity, or tier 1 capital less perpetual preferred stock, minority interests and trust preferred securities that qualified as tier 1 capital. tangible common equity is defined as total equity capital less perpetual preferred stock and related surplus ( net of related treasury stock ), goodwill and other intangible assets. four capital ratios are also calculated. the denominator for three ratios – the tier 1 risk - based capital ratio, the total risk - based capital ratio and the tier 1 common capital ratio – is risk - weighted assets. the denominator for the tangible common equity ratio is tangible assets, defined as total assets less goodwill and other intangible assets. it had been under 2 percent. these guidelines apply to the individual bank subsidiaries within a bank holding company. bis central bankers ’ speeches figure 3 highlights that since the worst phase of the crisis, 15 large u. s. banking organizations that have reported continuously through the crisis have made significant progress in improving both the quality and quantity of their capital. the most narrow capital definition on the chart – the ratio of tangible common equity to tangible assets – has risen from a little over 2 percent to almost 6 percent. this reflects both significant raising of external capital as well as dramatic declines in dividends and stock buybacks during the crisis and the early period of recovery. both of these dynamics have had a significant positive impact on the institutions ’ ability to withstand potential future stresses. figure 4 illustrates the amount and composition of capital – the numerators of the various capital ratios – at the 15 large banking organizations over a four - year period. you can see that there has been an appreciable amount of common equity raised by this group of large banks. the improvement in the quality and quantity of capital is quite striking. an important aspect of this recapitalization has been the supervisory use of stress tests to determine the adequacy of capital, and also in evaluating discretionary capital distributions ( such as increased dividend payouts ). the supervisory use of the stress tests is relatively new. it is worth noting and discussing the fact that it is not just capital regulation, but also supervision, that has been a driver of the recapitalization

assessment. it also highlighted where institutions needed to do additional work relative to peers to improve their risk management practices. the banks were evaluated on whether, over the two - year period under stress assumptions, they were likely to be able to maintain a tier 1 capital ratio of 6 percent and a tier 1 common capital ratio of 4 percent. it is worth noting that for most banks it was the tier 1 common capital ratio that was most binding, and was the capital definition that best reflected the ability to absorb losses. of the 19 banks, nine were sufficiently capitalized to meet the minimum capital ratios under stress conditions, while ten had a combined capital shortfall of $ 75 billion. the banks with a capital shortfall were expected to provide detailed capital plans that included raising additional capital – by measures such as restricting payouts, raising new equity, selling assets, or utilizing capital available from the u. s. treasury. banks both with and without shortfalls aggressively sold assets and raised additional capital, resulting in a very significant recapitalization of the 19 banks over a relatively short period of time – as is apparent in the figures shown earlier. stress testing and discretionary capital distributions now i would like to mention the role of other stress testing in decisions to pursue, and approve, the resumption of discretionary capital distributions. the scap was designed to estimate how banks would perform under stress conditions. however, the economic assumptions and the impact of those economic assumptions on financial institutions were by definition educated estimates of potential outcomes. by the end of 2010, many banks were noting that they had substantially recapitalized and in some cases were now well above regulatory minimums – and thus would like to resume or increase stock buybacks or dividend payments. to evaluate the requests by banks to increase dividend payments, u. s. bank supervisors pursued an exercise known as the comprehensive capital analysis and review ( ccar ), and stress testing was one component of that broader exercise. while the stress testing element was only part of the ccar review, it was an important input into evaluating banks ’ capital planning. the assessment was conducted between november 2010 and march 2011. once again the largest 19 u. s. domiciled bank holding companies were asked to participate, using a baseline scenario, their own stress scenario, and a supervisor - provided stress scenario ( a set of macroeconomic assumptions consistent with an economic downturn ). a critical benchmark was whether banks could meet a 5 percent tier 1 common capital ratio under