FRM Part II · FRM Exam Part II · Liquidity and Leverage
A bank reports total assets of $200 billion and Tier 1 capital of $8 billion. Using a simple, non-risk-weighted leverage measure, what is its leverage ratio expressed as Tier 1 capital divided by total assets?
The leverage ratio is Tier 1 capital divided by total assets, which is 8 divided by 200, or 4.0%. It ignores risk weights, so it is a simple backstop. Expressing assets over capital would give 25 times, a different measure.
- A2.0%
- B4.0%Correct
- C25.0%
- D8.0%
Explanation
Leverage ratio = Tier 1 capital / total assets = 8 / 200 = 4.0%. The 25.0% figure is the inverse (assets/capital would be 25x, not a percent), and 8.0% wrongly uses capital as the base. 2.0% halves the correct figure.
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