Economics • Banking & FinanceHard
What does 'Leverage Ratio' under Basel III regulations measure?
A. The ratio of Tier 1 capital to a bank's total unweighted exposures (on-balance-sheet and off-balance-sheet items).✓ Correct Answer
B. The ratio of total debt to shareholder equity in corporate loan portfolios.
C. The proportion of short-term liabilities covered by liquid assets.
D. The percentage of non-performing loans relative to total gross advances.
💡 Solution & Explanation
The Basel III leverage ratio is defined as a bank's Tier 1 capital measure divided by its total unweighted exposures, acting as a non-risk-based backstop to prevent excessive borrowing and leverage accumulation in the banking sector. Unlike risk-weighted capital adequacy requirements, this ratio treats all on-balance-sheet and off-balance-sheet items with equal scrutiny regardless of perceived risk weightings. Regulatory authorities enforce a mandatory minimum threshold to safeguard financial stability during economic downturns.
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