We advise credit institutions and investment firms on calculating, complying with and optimizing the leverage ratio: Tier 1 capital, the exposure measure and the 3% minimum requirement under Basel III and the CRR/CRR II Regulation. Supervision by the ECB, the Bank of Spain and the EBA.
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From calculating the exposure to optimizing the ratio: end-to-end advice on prudential leverage regulation.
We review your leverage ratio calculation: eligible Tier 1 capital, the total exposure measure (on-balance-sheet assets, derivatives, SFTs, off-balance-sheet items), and deductions and adjustments under Article 429 of the CRR.
Support in meeting the 3% minimum requirement, reporting to the EBA under the disclosure ITS (CRR Art. 451), and managing the additional buffer for G-SIIs.
We analyze the composition of your balance sheet to find ways to reduce the exposure measure without affecting the business: derivatives netting, treatment of SFTs and off-balance-sheet conversion factors.
Advice on the composition and quality of the Tier 1 capital that counts toward the leverage ratio: CET1, AT1, deductions and prudential adjustments under the CRR.
The leverage ratio interacts with know your customer (KYC) and due diligence requirements: highly leveraged institutions attract closer supervisory scrutiny on AML/CFT matters.
For payment institutions, EMIs and new investment firms, the prudential leverage regime has its own particular features. We advise you from the authorization stage through to ongoing reporting.
The 2008 financial crisis showed that risk-based ratios were not enough. The leverage ratio acts as a backstop: a simple, transparent, non-risk-based measure that limits excessive leverage.
"The Basel Committee introduced the leverage ratio in 2010 in response to the excessive leverage built up before the crisis. A provisional minimum of 3% Tier 1 capital over total exposure was set, and CRR II confirmed it as mandatory."
"Regulation (EU) 575/2013 (CRR) defined how the leverage ratio is calculated. CRR II (Regulation 2019/876) turned it into a mandatory Pillar 1 requirement of 3%, with an additional buffer for G-SIIs."
"Unlike capital ratios based on risk-weighted assets (RWAs), the leverage ratio does not depend on internal models. It is a safeguard against modeling errors and the underestimation of risk."
"Institutions identified as global systemically important institutions (G-SIIs) must meet an additional leverage ratio buffer equal to 50% of their G-SII capital buffer, which strengthens the soundness of the system."
Failing to meet the 3% minimum requirement triggers supervisory measures that can restrict the institution’s activity.
Restrictions on distributions: a breach of the leverage ratio can trigger restrictions on dividend distributions, share buybacks and AT1 coupon payments, in a similar way to the MDA (Maximum Distributable Amount).
Additional Pillar 2 requirements: the supervisor can impose additional leverage ratio requirements through the SREP if it considers that the institution faces a risk of excessive leverage not covered by the 3% minimum.
Impact on the business model: a tight leverage ratio can force the institution to reduce exposures (deleverage), raise additional capital or change the composition of its balance sheet, which affects profitability.
Regulation (EU) 2019/876 (CRR II) sets a mandatory Pillar 1 requirement of 3% Tier 1 capital over the total exposure measure, applicable to all credit institutions and investment firms.
G-SIIs must hold an additional leverage ratio buffer equal to 50% of their G-SII capital buffer. Failing to meet it triggers automatic restrictions on distributions.
For significant institutions directly supervised by the ECB (SSM), the leverage ratio is a key SREP indicator. The supervisor can require levels above the legal minimum.
We review your calculation, optimize your exposure, support you with regulatory reporting and prepare you for ECB and EBA supervision. Prudential regulation with a practical focus.
The leverage ratio is a non-risk-based regulatory measure that relates a financial institution’s Tier 1 capital to its total exposure measure. The formula is: Leverage Ratio = Tier 1 Capital / Total Exposure.
Unlike risk-weighted capital ratios (such as the CET1/RWA ratio), the leverage ratio applies no risk weights: all assets count at their full value. This makes it a simple, transparent, complementary measure that acts as a backstop against excessive leverage.
The mandatory minimum requirement is 3% Tier 1 capital over total exposure. It was introduced by CRR II (Regulation 2019/876) as a binding Pillar 1 requirement, confirming the calibration proposed by the Basel Committee.
For institutions identified as G-SIIs (Global Systemically Important Institutions), an additional buffer equal to 50% of their G-SII capital buffer applies on top of the 3% minimum.
The numerator is Tier 1 capital as defined in the CRR, which includes:
The capital ratio (CET1 ratio, Total Capital Ratio) is calculated on risk-weighted assets (RWAs): riskier assets weigh more. The leverage ratio applies no weighting: all assets count at their full value.
The leverage ratio acts as a backstop: even if an institution’s internal models underestimate risk (and therefore understate RWAs), the leverage ratio sets a capital floor on total exposure. The two measures complement each other.
The 3% requirement applies to all credit institutions and investment firms subject to the CRR. For investment firms subject to the IFR/IFD regime (Investment Firms Regulation), the prudential leverage requirements are different and generally less demanding.
Payment institutions and electronic money institutions are not subject to the CRR leverage ratio, although they have their own own-funds requirements.
CRR II allows institutions to temporarily exclude exposures to central banks from the total exposure measure, subject to certain conditions. When this exclusion is applied, the 3% minimum requirement is recalibrated upward to compensate, so that only recently accumulated exposures effectively benefit from the relief.
This measure was introduced in the context of the ECB’s expansionary monetary policies and initially applied until March 2022, although it has since been extended and revised.
Article 451 of the CRR requires public disclosure of the leverage ratio and its components. The EBA has published implementing technical standards (ITS) that set out the format and frequency of disclosure.
Institutions must disclose: the leverage ratio value, a breakdown of eligible Tier 1 capital, a breakdown of the exposure measure and a description of the processes used to manage the risk of excessive leverage.
The leverage ratio is simple in concept but operationally complex when it comes to calculating the exposure. These are the three areas we review.
CET1 + AT1, with all prudential deductions applied under the CRR: intangibles, DTAs, significant investments, prudent valuation adjustments (PVA). The quality of your capital determines your room for maneuver.
On-balance-sheet assets + derivatives add-ons (SA-CCR) + SFTs + off-balance-sheet items with CCFs - Tier 1 deductions. The denominator is where most of the calculation’s complexity and the optimization opportunities lie.
Monthly internal calculation, quarterly regulatory reporting, public disclosure under the EBA ITS, and monitoring within the institution’s risk appetite framework. The leverage ratio is a key SREP indicator.
If you need help with your leverage ratio, see our securities market services or request a free consultation.
If you work with the leverage ratio, these are the terms you need to master.
A regulatory measure that relates Tier 1 capital to the institution’s total exposure, with no risk weighting. Minimum requirement of 3% under CRR II.
Regulation (EU) 575/2013, which sets the prudential requirements for credit institutions and investment firms: capital, liquidity, leverage and large exposures. Amended by CRR II (Reg. 2019/876).
The highest-quality capital for absorbing losses: CET1 (common shares, reserves) + AT1 (perpetual subordinated instruments). It is the numerator of the leverage ratio.
The standardized method for measuring the potential future exposure of derivatives for leverage ratio and RWA purposes. It replaced the current exposure method in 2017.
An institution of global systemic importance, identified each year by the FSB. It is subject to an additional leverage ratio buffer of 50% of its G-SII capital buffer.
The supervisory review process through which the ECB or the Bank of Spain assesses the institution’s capital adequacy, liquidity and risk management. The leverage ratio is a key SREP indicator.
A factor that converts off-balance-sheet items (undrawn credit lines, guarantees) into an equivalent on-balance-sheet exposure for leverage ratio purposes.
The leverage ratio acts as a backstop to risk-based capital ratios: if internal models underestimate risk, the leverage ratio sets a capital floor on gross exposure.
The internal process through which the institution assesses whether its capital is adequate for all its risks, including the risk of excessive leverage. The leverage ratio must be built into this exercise.
LEVERAGE RATIO CONSOLE
How demanding the leverage ratio is depends on the type of institution and its systemic importance.
The 3% minimum is universal, but G-SIIs and institutions directly supervised by the ECB may face additional requirements.
Tell us about your situation and we will explain how we can help you with the leverage ratio: calculation, compliance, optimization or reporting.
The leverage ratio is a prudential measure introduced by the Basel Committee under Basel III in response to the excessive leverage that contributed to the 2008 financial crisis. Unlike capital ratios based on risk-weighted assets, the leverage ratio is a simple, non-risk-based measure that acts as a backstop, ensuring a minimum level of capital over the institution’s total exposure.
In the European Union, the leverage ratio was first built into Regulation (EU) 575/2013 (CRR), which set out how to calculate it in Article 429. When Regulation (EU) 2019/876 (CRR II) entered into force, the leverage ratio went from being a disclosure measure to a mandatory Pillar 1 requirement, set at a minimum of 3% Tier 1 capital over the total exposure measure.
Institutions identified as global systemically important institutions (G-SIIs) must meet an additional leverage ratio buffer equal to 50% of their G-SII capital buffer. Failing to meet it triggers automatic restrictions on profit distributions, in a similar way to the Maximum Distributable Amount (MDA) for capital ratios.
The leverage ratio is a key indicator in the supervisory review and evaluation process (SREP) of the ECB and the Bank of Spain. The supervisor can impose additional Pillar 2 leverage ratio requirements if it considers that the institution faces a risk of excessive leverage. CRD V (Directive 2019/878) also requires institutions to include the risk of excessive leverage in their internal capital adequacy assessment process (ICAAP).
Key legislation, linked to the official text:
Legislation and links reviewed in .