top of page
Leverage Ratio
The leverage ratio measures a bank’s capital relative to its total exposure without risk weighting.
Meaning in Practice
It is calculated by dividing Tier 1 capital by total assets and off-balance-sheet exposures. Unlike risk-based ratios, it does not adjust for asset risk levels. It serves as a backstop to risk-weighted capital requirements.
Why It Matters
The leverage ratio limits excessive balance sheet expansion and reduces systemic vulnerability. It provides a simple and transparent solvency safeguard.
Market Impact
Higher leverage requirements can constrain asset growth and profitability. However, stronger capital positions typically improve investor confidence.
Example
A bank with €10 billion in Tier 1 capital and €200 billion in total exposure has a leverage ratio of 5%.
Related Terms
bottom of page