Tier 1 Leverage Ratio
Tier 1 capital divided by total average assets, without risk weighting.
Definition
The Tier 1 leverage ratio is a non-risk-weighted measure of capital adequacy. Unlike the Tier 1 capital ratio, it uses total average assets in the denominator rather than risk-weighted assets. This acts as a backstop to prevent banks from gaming risk weights.
Formula
Leverage Ratio = Tier 1 Capital / Average Total Assets × 100
Why It Matters
The leverage ratio ensures banks hold minimum capital regardless of their asset mix. A bank could theoretically have a high risk-based capital ratio by holding low-risk-weight assets but still be undercapitalized on a leverage basis.