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FRM Part II · FRM Exam Part II · Capital Structure in Banks

A bank has Tier 1 capital of 80, total exposure measure of 2,000, and risk-weighted assets of 800. The bank's regulator applies a 3% minimum Basel III leverage ratio. Which conclusion is correct?

The leverage ratio is 4.0%, which meets the 3% minimum. It is calculated as Tier 1 capital of 80 divided by the non-risk-weighted exposure measure of 2,000. The 10% figure is the risk-based Tier 1 ratio using RWA, a different measure.

  1. ALeverage ratio is 4.0% and meets the minimum, even though the risk-based Tier 1 ratio is 10%Correct
  2. BLeverage ratio is 10.0% and meets the minimum
  3. CLeverage ratio is 4.0% and fails the minimum
  4. DLeverage ratio is 2.5% and fails the minimum

Explanation

The leverage ratio is Tier 1 divided by the total exposure measure: 80/2,000 = 4.0%, above 3%. The 10% figure is Tier 1 over RWA, a risk-based ratio, not the leverage ratio. The leverage ratio is non-risk-weighted.

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