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CS Professional · Banking and Insurance - Laws and Practice · Risk Management in Banks and Basel Accords

Under the Basel III leverage ratio, Tier 1 capital is divided by the bank's total exposure measure. Kaveri Bank has Tier 1 capital of Rs 1,800 crore, on-balance sheet exposures of Rs 52,000 crore and off-balance sheet exposures (after credit conversion) of Rs 8,000 crore. Which statement is correct?

The leverage ratio is 3.00%. Tier 1 capital of Rs 1,800 crore is divided by the total non-risk-weighted exposure measure of Rs 60,000 crore, which includes both on-balance sheet and off-balance sheet exposures. Risk-weighted assets are not used.

  1. ALeverage ratio is 3.46%, computed using only on-balance sheet exposures
  2. BLeverage ratio is 3.00%, computed on the total exposure of Rs 60,000 croreCorrect
  3. CLeverage ratio is 3.00%, computed using risk-weighted assets as denominator
  4. DLeverage ratio is 4.00%, since off-balance sheet items are excluded

Explanation

Exposure measure = 52,000 + 8,000 = Rs 60,000 crore. Leverage ratio = 1,800 / 60,000 = 3.00%. The 3.46% option uses on-balance sheet only (1,800/52,000), which is wrong because off-balance items are included. The leverage ratio is non-risk-based, so RWAs are not used.

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