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

Under the Basel III leverage ratio framework, which of the following correctly describes the minimum requirement and the measure of capital used in the ratio?

The Basel III leverage ratio has a 3% minimum and divides Tier 1 capital by the total exposure measure. The denominator is not risk-weighted, so the ratio works as a simple backstop to risk-based capital requirements.

  1. A3% minimum, with Tier 1 capital in the numerator and total exposure measure in the denominatorCorrect
  2. B3% minimum, with total capital in the numerator and risk-weighted assets in the denominator
  3. C8% minimum, with Common Equity Tier 1 in the numerator and total exposure measure in the denominator
  4. D4.5% minimum, with Tier 1 capital in the numerator and risk-weighted assets in the denominator

Explanation

The Basel III leverage ratio is Tier 1 capital divided by a non-risk-based total exposure measure, with a minimum of 3%. Options using risk-weighted assets describe risk-based ratios, which defeats the purpose of a backstop that does not depend on risk weights.

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