Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.4.5:2.4.5 Leverage ratio

Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.4.5

2.4.5 Leverage ratio

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The leverage ratio is an additional prudential measure to enhance financial stability by determining capital requirements on the basis of non-risk weighted assets so as to prevent the building up of excessive leverage during economic upswings and to act as a backstop to internal model based capital requirements. It is essentially the amount of Tier 1 capital of a bank divided by its total assets.1 According to Gleeson it is merely a backstop that exists to ensure that banks do not aggressively game the system.2 There is no minimum requirement yet in relation to the leverage ratio.

CRR II includes a binding leverage ratio of 3% which will prevent banks from excessively increasing leverage, e.g. to compensate for low profitability.3

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