Tier 1 Leverage Ratio

The Basel III framework introduced a regulatory leverage ratio. This is calculated as the ratio of a bank’s Tier 1 capital (cf.) to its total unweighted exposures (on-balance sheet exposures; derivative exposures; securities financing transaction exposures; and off-balance-sheet items. It was introduced to prevent banks from leveraging their balance sheets and creating risks to financial stability. A low leverage ratio indicates a bank has high levels of debt relative to its going-concern loss-absorbing capital.