Tier 1 capital refers to the core capital of a bank, which includes its common equity and retained earnings. This capital is essential for a bank's financial stability, as it serves as a buffer against losses. Regulators require banks to maintain a certain level of Tier 1 capital to ensure they can absorb financial shocks and continue operating effectively. The importance of Tier 1 capital is highlighted in the Basel III framework, which sets international standards for bank capital adequacy. By maintaining adequate Tier 1 capital, banks can promote confidence among depositors and investors, contributing to the overall stability of the financial system.