@paul can explain it better than me but my understanding is it relates to the capital (or shareholdings) being divided into tiers.
At the bottom of the capital structure is equity or common stock and retained earnings. This is what is used in the Core Equity Tier 1 Ratio. Banks in Europe are required to hold at least 9% of this against their assets which are risk weighted according to certified models ( i.e. some assets require less capital for the bank to hold than others because they deemed less risky - though this is a topic for @paul !)
Any loss that a bank may incur are first deducted from the bottom of this capital structure, and in the event that the bank CET1 ratio drops below regulatory minimums, the bank must submit a credible plan to the PRA to rebuild the capital ratio back above the minimum threshold or face being run by the Regulator or potentially shut down. While this “repair” process is occurring the bank may have certain provisions forced on it by the regulator such as non-payment of dividends, non-payment of discretionary coupons on targeted bonds, and more recently the possible suspension of bonuses.
If losses are so severe the regulator decides to wind-down the bank, then normal insolvency rules prevail and losses are first allocated to the equity holders until they are completely wiped out. After this they are allocated to preference shareholders and hybrid Tier 1 note-holders. Beyond this we go to Tier 2 capital, starting with Upper Tier 2 and when that is wiped out, Lower Tier 2.
If losses exceed the capital base, then senior bond-holders and depositors can also be affected, as we saw recently in Cyprus, although this is very rare.
