This chapter describes how to calculate the leverage ratio and the minimum requirements.
The Basel III leverage ratio is intended to:
restrict the build-up of leverage in the banking sector to avoid destabilising deleveraging processes that can damage the broader financial system and the economy; and
reinforce the risk-based capital requirements with a simple, non-risk-based “backstop” measure.
The Basel Committee is of the view that a simple leverage ratio framework is critical and complementary to the risk-based capital framework and that the leverage should adequately capture both the on- and off-balance sheet sources of banks’ leverage.
The leverage ratio is defined as the capital measure (the numerator) divided by the exposure measure (the denominator), with this ratio expressed as a percentage:
The capital measure for the leverage ratio is Tier 1 capital – comprising Common Equity Tier 1 and/or Additional Tier 1 instruments – as defined in CAP10. In other words, the capital measure used for the leverage ratio at any particular point in time is the Tier 1 capital measure applicable at that time under the risk-based framework. The exposure measure for the leverage ratio is defined in LEV30.
A bank's total leverage ratio exposure measure is the sum of the following exposures, as defined in LEV30:1
on-balance sheet exposures (excluding on-balance sheet derivative and securities financing transaction exposures);
derivative exposures;
securities financing transaction exposures; and
off-balance sheet items.