FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

Basel III Output Floor and Leverage Ratio Revisions

Updated 11 October 2026 · Fact-checked

The output floor requires a bank's total risk-weighted assets (RWA) from internal models to be at least 72.5% of RWA computed under the standardised approaches. Floored RWA = max(model RWA, 72.5% × standardised RWA). The finalised leverage ratio adds a G-SIB buffer equal to 50% of the G-SIB's higher-loss-absorbency risk-weighted requirement.

Understand Output Floor and Leverage Ratio Revisions

Internal models let banks calculate lower RWA than standardised rules would give. Before the finalisation, this variability was large and hard to compare across banks. The output floor limits how far modelled RWA can fall below standardised RWA. It is a backstop, not a replacement for models.

The floor is aggregate. You calculate total RWA under the internal approaches, and total RWA under the standardised approaches across the same exposures and risks. The floor is 72.5% of the standardised total. Your reported RWA is the higher of the two. It applies at the top level of consolidation and on a total-bank basis, not risk type by risk type.

The floor is phased in so that banks can adjust. The finalised standards set a transition starting at 50% and rising by 5 percentage points each year to reach 72.5% at the end. Dates were later deferred by the Basel Committee, so know the shape of the path (50%, 55%, 60%, 65%, 70%, 72.5%) rather than relying on calendar years.

The leverage ratio is a non-risk-based backstop: Tier 1 capital divided by total exposure (on and off balance sheet), with a minimum of 3%. The finalisation added a G-SIB leverage ratio buffer. It is set at 50% of the G-SIB's higher-loss-absorbency (risk-weighted) buffer requirement. For example, a G-SIB with a 2% risk-weighted buffer faces a 1% leverage buffer, so its leverage ratio requirement is 3% + 1% = 4%. The buffer must be met with Tier 1 capital. Breaching it leads to distribution constraints.

The revisions also tightened the exposure measure, for example the treatment of derivatives and securities financing transactions, and a related change to the window-dressing of quarter-end exposures. For exams, focus on the floor mechanics and the buffer arithmetic.

Key formulas to remember

Output floor: RWA (floored) = max[ RWA internal models ; 72.5% × RWA standardised ]; Applied to total RWA, in aggregate, not risk type by risk type.
Floor add-on: Add-on = max(0 ; 72.5% × RWA standardised − RWA internal models); The extra RWA the floor creates when it binds.
Leverage ratio: Leverage ratio = Tier 1 capital ÷ Total exposure measure; Minimum 3%. Not risk-weighted.
G-SIB leverage buffer: Leverage buffer = 50% × G-SIB higher-loss-absorbency buffer (risk-weighted); Met with Tier 1 capital; added to the 3% minimum.
Phase-in path: 50% → 55% → 60% → 65% → 70% → 72.5%; Steps of 5 percentage points, final step is 2.5 points.

How to solve Output Floor and Leverage Ratio Revisions questions

Use this method for any output floor or leverage ratio question.

1Identify what is asked: floored RWA, the add-on, a capital ratio, or a leverage requirement.
2For the floor, find both totals: RWA from internal models and RWA from the standardised approaches.
3Pick the floor percentage for the year. Use 72.5% when fully phased in, or the transitional percentage given.
4Compute floor level = percentage × standardised RWA, then take the higher of that and the model RWA.
5For ratios, divide capital (CET1 or Tier 1) by the floored RWA, not the model RWA.
6For leverage, add the G-SIB buffer (50% of the risk-weighted buffer) to the 3% minimum, then compare with Tier 1 ÷ exposure.
7State the interpretation: does the floor bind, and what does that mean for capital.

Quickest way: Floor check in three lines

When to use it: When options differ by the answer to whether the floor binds.

Multiply standardised RWA by the floor percentage.
Compare with model RWA. The larger number is the RWA to use.
Leverage: requirement = 3% + half of the G-SIB risk-weighted buffer. Then do Tier 1 ÷ exposure.

Common mistakes in Output Floor and Leverage Ratio Revisions

Applying the 72.5% floor to model RWA instead of standardised RWA.
The word 'floor' makes people think of a floor on the modelled number.
Fix: The floor is 72.5% of the standardised total. It is compared with the model total.
Applying the floor risk type by risk type.
Candidates mix it up with input floors on PD, LGD and similar parameters.
Fix: The output floor is aggregate over total RWA. Input floors are separate parameter limits.
Adding the full G-SIB buffer to the leverage ratio.
Candidates forget the 50% scaling.
Fix: Leverage buffer = 50% of the risk-weighted G-SIB buffer. A 2.5% buffer becomes 1.25%.
Dividing capital by model RWA after the floor binds.
The model figure is the one banks report first.
Fix: Use the floored RWA as the denominator of the capital ratio.
Treating the leverage ratio as risk-weighted or using CET1 only.
Confusion with the risk-based capital ratios.
Fix: Leverage ratio uses Tier 1 capital over total exposure, with no risk weights.
Memorising calendar dates for the phase-in.
Dates were deferred and differ across jurisdictions.
Fix: Remember the 50% start and the 5-point yearly steps to 72.5%.

Worked examples

Example 1

A bank has internal-model RWA of USD 300 billion and standardised RWA of USD 500 billion. Its CET1 capital is USD 45 billion. Under the fully phased-in output floor, what is its CET1 ratio?

Show the solution

Floor level = 72.5% × 500 = USD 362.5 billion.
Model RWA of 300 is below 362.5, so the floor binds.
Floored RWA = USD 362.5 billion. The add-on is 62.5 billion.
CET1 ratio = 45 ÷ 362.5 = 12.41%.

Answer: The floor binds and the CET1 ratio is about 12.41% (versus 15.0% on model RWA).

Example 2

A G-SIB has a risk-weighted higher-loss-absorbency buffer of 2.0%. Its Tier 1 capital is EUR 60 billion and its total exposure measure is EUR 1,400 billion. Does it meet its leverage ratio requirement?

Show the solution

Leverage buffer = 50% × 2.0% = 1.0%.
Requirement = 3% + 1.0% = 4.0%.
Leverage ratio = 60 ÷ 1,400 = 4.29%.
4.29% is above 4.0%.

Answer: Yes. The ratio of about 4.29% exceeds the 4.0% requirement by about 0.29 percentage points.

Exam tips

Always work out which RWA total is larger before computing any ratio.
Watch for the phrase 'transitional': use the percentage given, not 72.5%.
Questions on the G-SIB buffer test the 50% scaling and that it is met with Tier 1 capital.
Separate output floor (aggregate, on RWA) from input floors (parameter level) when options are conceptual.
Interpretation matters: a binding floor means modelled capital savings are capped.

Practice questions from Basel III: Finalising Post-crisis Reforms

Output Floor and Leverage Ratio Revisions: frequently asked questions

What is the output floor under Basel III?

It is a limit that sets a bank's total RWA at no less than 72.5% of the RWA under standardised approaches. It reduces the capital benefit of internal models and improves comparability between banks.

How is the output floor phased in?

It starts at 50% and rises by 5 percentage points a year to 70%, then reaches 72.5% at the final step. Implementation dates have been deferred by the Basel Committee, so learn the percentages rather than the years.

What is the G-SIB leverage ratio buffer?

It is an extra Tier 1 requirement on top of the 3% minimum leverage ratio. It equals 50% of the G-SIB's risk-weighted higher-loss-absorbency buffer. Falling short restricts distributions.

Does the output floor replace internal models?

No. Banks still use models for risk management and calculate model RWA. The floor only applies if 72.5% of standardised RWA exceeds model RWA.