Introduction
1. An underlying cause of the global financial crisis was the build-up of excessive on- and off-balance sheet leverage in the banking system. In many cases, banks built up excessive leverage while reporting strong risk-based capital ratios. At the height of the crisis, financial markets forced the banking sector to reduce its leverage in a manner that amplified downward pressures on asset prices. This deleveraging process exacerbated the feedback loop between losses, falling bank capital and contracting credit availability.
2. The Basel III framework introduced a simple, transparent, non-risk-based leverage ratio to act as a credible supplementary measure to the risk-based capital requirements [Basel Committee on Banking Supervision, Basel III: A global regulatory framework for more resilient banks and banking systems, June 2011.]. The leverage ratio is intended to:
- restrict the build-up of leverage in the banking sector to avoid destabilising deleveraging processes that
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