How it works

The leverage ratio expresses a bank's tier 1 capital as a percentage of its total exposure measure, which aggregates on-balance-sheet assets, derivative exposures, securities-financing transactions and off-balance-sheet items without applying risk weights. Because the denominator is not risk-weighted, the ratio is deliberately blunt: it constrains the absolute size of a bank's balance sheet relative to its capital, regardless of how safe the assets are judged to be.

Its purpose is to serve as a backstop to the risk-based framework. The primary capital requirements are calculated against the total risk exposure amount, where each asset carries a risk weight. That approach is more risk-sensitive but depends on the accuracy of the models and weights used; if those understate risk, a bank can appear well-capitalised while being highly leveraged. The leverage ratio caps this by imposing a floor that does not rely on risk weights at all. The minimum is 3%.

The leverage ratio is calculated under CRR Art. 429, which defines the total exposure measure, while the binding 3% minimum requirement is set in CRR Art. 92(1)(d). A leverage ratio buffer applies to global systemically important institutions under CRR Art. 92(1a), requiring them to hold additional tier 1 capital against their exposure measure. These provisions were finalised in the EU by CRR II.

Relationship to own funds and MREL

The leverage ratio uses tier 1 own funds — common equity tier 1 plus additional tier 1 — in its numerator, so the quality of a bank's capital feeds directly into it. It also connects to the resolution framework: MREL is expressed as two parallel requirements, one relative to the total risk exposure amount and one relative to the leverage ratio exposure measure. A bank must meet both, so the leverage-based limb ensures that loss-absorbing capacity scales with the raw size of the balance sheet, not only with risk-weighted assets. The same logic applies to the TLAC standard for global systemically important institutions.

Relevance for resolution and loss absorption

Because it is model-independent, the leverage ratio is a robust check on going-concern loss absorption: it guarantees a minimum layer of capital against total exposures that cannot be optimised away through favourable risk weighting. For resolvability, the leverage-based MREL requirement means a large but low-risk-weight balance sheet still carries substantial bail-inable capacity. Analysts often read the leverage ratio alongside the CET1 ratio precisely because the two can diverge — a comfortable risk-weighted ratio paired with a thin leverage ratio flags a balance sheet whose safety depends heavily on the risk weights holding true.