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FRM Part II · FRM Exam Part II · Solvency, Liquidity and Other Regulation After the Global Financial Crisis

A bank has Tier 1 capital of USD 36 billion, on-balance-sheet exposures of USD 700 billion, derivative exposures of USD 60 billion, securities financing transaction exposures of USD 40 billion, and off-balance-sheet items after credit conversion factors of USD 100 billion. Using the Basel III leverage ratio definition (Tier 1 capital divided by total exposure measure), what is the leverage ratio?

The leverage ratio is 4.0%. Total exposure is 700 + 60 + 40 + 100 = USD 900 billion, and Tier 1 capital of USD 36 billion divided by 900 gives 4.0%. Excluding derivatives, financing and off-balance-sheet items would overstate the ratio at 5.1%.

  1. A4.0%Correct
  2. B4.5%
  3. C5.1%
  4. D3.6%

Explanation

Total exposure = 700 + 60 + 40 + 100 = 900 billion. Ratio = 36/900 = 4.0%. Using only on-balance-sheet assets gives 36/700 = 5.1%, which ignores off-balance-sheet and derivative exposures.

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