FRM Exam Part II · High-level Summary of Basel III Reforms

Basel III Leverage Ratio and G-SIB Leverage Buffer

Updated 11 October 2026 · Fact-checked

The Basel III leverage ratio is Tier 1 capital divided by total exposure, with no risk weights. The minimum is 3%. The finalised reforms revised the exposure measure, and added a leverage ratio buffer for G-SIBs equal to 50% of the bank's risk-based higher-loss-absorbency (HLA) buffer. Solve by finding the exposure, then the ratio, then the buffer.

Understand Leverage Ratio Revisions and G-SIB Buffer

A risk-based capital ratio divides capital by risk-weighted assets (RWA). It depends on risk weights and on models. If weights are too low or models are wrong, a bank can look well capitalised while holding a huge balance sheet. The 2007-2009 crisis showed this.

The leverage ratio is a simple backstop. It divides Tier 1 capital by a total exposure measure. It ignores risk weights. A government bond and a speculative loan of the same size count the same. This makes it hard to game, and it limits the build-up of leverage. It does not replace risk-based ratios. It sits next to them, and whichever binds more is the tighter constraint.

The exposure measure includes on-balance-sheet assets, derivative exposures, securities financing transaction (SFT) exposures and off-balance-sheet items. Off-balance-sheet items are converted with credit conversion factors (CCFs), subject to a floor of 10% for unconditionally cancellable commitments. Derivatives use replication cost plus potential future exposure, with limited netting and with collateral recognised only in tightly defined cases. Written credit derivatives are capped by effective notional adjustments. The finalised reforms revised how derivatives, SFTs and off-balance-sheet items enter the measure, and added a rule on central bank reserves in exceptional circumstances.

For G-SIBs, the finalised framework adds a leverage ratio buffer. It is set at 50% of the bank's risk-based higher-loss-absorbency (HLA) requirement. For example, a G-SIB with a 2% risk-based buffer faces a leverage buffer of 1%. The minimum is therefore 3% + 50% × HLA. The buffer must be met with Tier 1 capital. Breaching the buffer leads to restrictions on distributions, much like the capital conservation buffer.

The point for the exam: the leverage ratio is a non-risk-based backstop, and the G-SIB buffer scales with the bank's systemic importance, so the most systemic banks must hold more.

Key formulas to remember

Basel III leverage ratio: Leverage ratio = Tier 1 capital ÷ Total exposure measure; No risk weights. Minimum is 3%.
G-SIB leverage ratio buffer: Leverage buffer = 50% × G-SIB higher-loss-absorbency (HLA) risk-based buffer; Met with Tier 1 capital. Applies only to G-SIBs.
G-SIB minimum leverage requirement: Requirement = 3% + 50% × HLA buffer; Example: HLA of 2.5% gives 3% + 1.25% = 4.25%.
Exposure measure components: Exposure = On-balance-sheet + Derivatives + SFT + Off-balance-sheet (after CCFs); Off-balance-sheet items use CCFs, with a 10% floor for unconditionally cancellable commitments.
Risk-based ratio (for contrast): Capital ratio = Capital ÷ Risk-weighted assets; Sensitive to risk weights. The leverage ratio is not.

How to solve Leverage Ratio Revisions and G-SIB Buffer questions

Use this order for any leverage ratio or G-SIB buffer question.

1Identify what is asked: the ratio, the exposure measure, the buffer, or whether a bank complies.
2Confirm the numerator is Tier 1 capital, not total capital and not CET1 alone unless stated.
3Build the exposure measure by adding on-balance-sheet, derivative, SFT and off-balance-sheet items. Apply CCFs to off-balance-sheet items.
4Do not apply risk weights anywhere.
5Divide Tier 1 by exposure to get the ratio.
6For a G-SIB, find the HLA buffer, take 50% of it, and add it to 3% to get the requirement.
7Compare the ratio with the requirement and state compliant or shortfall, with the amount of Tier 1 needed if asked.
8Check whether the question asks for the binding constraint against the risk-based ratio.

Quickest way: Three-line leverage check

When to use it: Use when the question gives numbers and four close answer options.

Total exposure = sum of all given exposure items. Convert off-balance-sheet with the CCF first.
Requirement = 3% for a normal bank. For a G-SIB, 3% + half the HLA buffer.
Required Tier 1 = requirement × exposure. Compare with actual Tier 1.

Common mistakes in Leverage Ratio Revisions and G-SIB Buffer

Applying risk weights to assets in the leverage ratio.
Students mix it up with the risk-based capital ratio.
Fix: Remember the leverage ratio is non-risk-based. Every exposure counts at full value, after CCFs for off-balance-sheet items.
Using total capital or RWA in the formula.
The risk-based ratio uses RWA and several capital tiers.
Fix: Use Tier 1 capital over the total exposure measure.
Setting the G-SIB leverage buffer equal to the HLA buffer.
Students remember the two buffers are linked but forget the fraction.
Fix: The leverage buffer is 50% of the HLA buffer. Then add it to the 3% minimum.
Forgetting CCFs on off-balance-sheet items.
Students treat commitments as nominal amounts, or ignore them.
Fix: Multiply the notional by the CCF before adding. Unconditionally cancellable commitments carry a 10% floor.
Saying the leverage ratio replaces risk-based ratios.
It is called a backstop, which is misread as a substitute.
Fix: It is a complement. Either ratio may be the binding constraint for a given bank.

Worked examples

Example 1

A bank has Tier 1 capital of USD 30 billion. Its exposure measure comprises on-balance-sheet assets of USD 700 billion, derivative exposures of USD 120 billion, SFT exposures of USD 80 billion and off-balance-sheet commitments with notional USD 200 billion at a 40% CCF. Compute the leverage ratio.

Show the solution

Off-balance-sheet exposure = 200 × 40% = USD 80 billion.
Total exposure = 700 + 120 + 80 + 80 = USD 980 billion.
Leverage ratio = 30 ÷ 980 = 3.06%.

Answer: The leverage ratio is about 3.06%, just above the 3% minimum.

Example 2

A G-SIB has an HLA risk-based buffer of 2.0%, Tier 1 capital of USD 55 billion and an exposure measure of USD 1,100 billion. Does it meet its leverage requirement? State any shortfall.

Show the solution

Leverage buffer = 50% × 2.0% = 1.0%.
Requirement = 3% + 1.0% = 4.0%.
Actual ratio = 55 ÷ 1,100 = 5.0%.
Required Tier 1 = 4.0% × 1,100 = USD 44 billion.

Answer: The bank complies. Its ratio of 5.0% exceeds the 4.0% requirement, and its Tier 1 of USD 55 billion exceeds the USD 44 billion needed, a surplus of USD 11 billion.

Exam tips

Expect a calculation with a CCF and an HLA buffer. Do the CCF step first, then the ratio.
If the stem says G-SIB, always add 50% of the HLA buffer to 3%. Do not stop at 3%.
Watch for distractors that include RWA. They signal the wrong ratio.
Conceptual questions test why a non-risk-based backstop exists: model risk and risk-weight gaming.
Read whether the numerator is Tier 1. Some options use CET1 or total capital.

Practice questions from High-level Summary of Basel III Reforms

Leverage Ratio Revisions and G-SIB Buffer: frequently asked questions

How is the Basel III leverage ratio calculated?

Divide Tier 1 capital by the total exposure measure. The exposure measure includes on-balance-sheet assets, derivatives, SFTs and off-balance-sheet items after CCFs. No risk weights are used.

What is the difference between the leverage ratio and the risk-based capital ratio?

The risk-based ratio divides capital by risk-weighted assets, so it depends on risk weights and models. The leverage ratio divides Tier 1 by unweighted exposure, so it acts as a simple backstop.

What is the G-SIB leverage ratio buffer?

It is an extra Tier 1 requirement above the 3% minimum for global systemically important banks. It equals 50% of the bank's risk-based HLA buffer. Breaching it restricts distributions.

What changed in the leverage ratio exposure measure?

The finalised reforms revised how derivatives, SFTs and off-balance-sheet items are measured, and addressed treatment of central bank reserves in exceptional circumstances. Focus on the structure of the exposure measure and on CCFs for the exam.