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

Under the Basel III post-crisis reforms, a bank's leverage ratio is calculated as Tier 1 capital divided by which measure?

The leverage ratio divides Tier 1 capital by a total exposure measure that is not risk-weighted. It captures on-balance-sheet assets, derivatives, securities financing and off-balance-sheet items, acting as a simple backstop to risk-based capital requirements rather than relying on risk weights.

  1. ARisk-weighted assets under the standardised approach
  2. BTotal exposure measure, which is not risk-weightedCorrect
  3. CTotal assets excluding off-balance-sheet items
  4. DCommon Equity Tier 1 plus Additional Tier 1 less deductions only

Explanation

The Basel III leverage ratio uses Tier 1 capital as numerator and a non-risk-based total exposure measure as denominator. The exposure measure includes on-balance-sheet assets, derivatives, securities financing transactions and off-balance-sheet items. Risk-weighted assets would make it a risk-based ratio, which defeats its purpose as a backstop.

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