The Tier 1 leverage ratio compares Tier 1 capital with a non-risk-weighted exposure measure, providing a backstop to risk-based capital ratios.
The Tier 1 leverage ratio compares a bank’s Tier 1 capital with a broad, non-risk-weighted exposure measure. Under the Basel Framework, it is designed as a simple backstop to risk-based capital ratios and includes specified on-balance-sheet and off-balance-sheet exposures.
The exact denominator depends on jurisdiction. The Basel leverage ratio uses a total leverage exposure measure; some national frameworks also define a traditional Tier 1 leverage ratio based on adjusted average assets and a separate supplementary leverage ratio.
The Basel exposure measure includes:
The calculation generally follows gross accounting values, with specified adjustments. Collateral, guarantees, and netting cannot automatically reduce the exposure measure in the same way they may affect risk-based RWA.
Assume a bank reports:
| Item | Amount |
|---|---|
| Tier 1 capital | $10 billion |
| On-balance-sheet exposure | $220 billion |
| Derivative exposure | $15 billion |
| Securities-financing exposure | $10 billion |
| Off-balance-sheet exposure after conversion | $5 billion |
| Total leverage exposure | $250 billion |
If the bank adds $25 billion of low-risk-weight assets and funds them with liabilities, its RWA-based ratio might change only modestly while its leverage ratio falls to about 3.64%:
This illustrates the backstop function. Even low-risk-weight exposures create leverage.
| Term | Simplified denominator | Important note |
|---|---|---|
| Basel leverage ratio | Total leverage exposure | International Basel standard |
| U.S. Tier 1 leverage ratio | Adjusted average total consolidated assets | U.S. regulatory definition; not identical to the Basel exposure measure |
| U.S. supplementary leverage ratio | Total leverage exposure under U.S. rules | Applies under the scope defined by U.S. regulation |
Do not compare percentages until the denominator, scope, averaging convention, and rule are confirmed.
| Feature | Leverage ratio | Tier 1 capital ratio |
|---|---|---|
| Numerator | Tier 1 capital | Tier 1 capital |
| Denominator | Non-risk-weighted exposure measure | RWA |
| Main strength | Simple backstop; captures broad leverage | Differentiates exposures by regulatory risk |
| Main limitation | Treats many exposures similarly regardless of risk | Depends on risk weights, methods, and models |
The two ratios are complementary. A bank may be constrained by either one depending on its asset mix and business model.
The leverage ratio does not show whether a bank can meet near-term cash outflows. Liquidity analysis uses different measures and evidence, including:
A bank can be well capitalized but illiquid, or liquid at a point in time but weakly capitalized.
Risk-based systems can assign low weights to exposures or rely on complex models. The leverage ratio limits total exposure relative to Tier 1 capital without relying on those weights.
It can influence:
The Basel minimum leverage ratio is 3%. Higher requirements can apply to systemic banks, and national rules may differ. A reported ratio above 3% does not establish that a bank meets every applicable requirement.
This page provides general financial education, not investment, banking, accounting, legal, or regulatory advice. Confirm the jurisdiction, denominator, scope, and current rule before comparing leverage ratios.