Leverage Ratio [SLR]

The leverage ratio is a non-risk-based measure of bank capital, calculated as Tier 1 capital divided by total exposure (including off-balance sheet items), providing a backstop to risk-based capital requirements. Basel III requires a minimum 3% leverage ratio, though U.S. regulations set 4% for banks and 5% for bank holding companies, with 6% for the largest institutions. For example, a bank with $50 billion in Tier 1 capital and $1 trillion in total exposure has a 5% leverage ratio. Unlike risk-weighted ratios, the leverage ratio treats all assets equally, preventing gaming through low risk-weight assets. Total exposure includes on-balance sheet assets, derivative exposures (using potential future exposure method), securities financing transactions, and off-balance sheet items (credit conversion factors applied). The supplementary leverage ratio (SLR) for large banks includes off-balance sheet exposures. During COVID-19, regulators temporarily excluded Treasury securities and central bank reserves from leverage calculations to support lending. Critics argue leverage ratios discourage low-risk assets like government bonds, while supporters value their simplicity and inability to be gamed.