A leverage ratio is a simple indicator of a bank’s solvency that relates a firm’s capital resources to its exposures or assets.
The lower a firm’s leverage ratio, the more it relies on debt to fund its assets. Unlike the risk-weighted capital framework, a leverage ratio does not seek to estimate the relative riskiness of assets.
Leverage ratio = Capital
Exposures
In the run-up to the global financial crisis, the build-up of excessive on and off balance sheet leverage was a material weakness of the banking system in many countries, including the United Kingdom. During the crisis, the banking sector was forced to rapidly reduce its leverage, exacerbating the impact on asset prices and on real economy lending. The leverage ratio aims to mitigate the risks of such excessive balance sheet ‘stretch’.
Direction powers will enable the FPC to integrate the leverage ratio into the regulatory framework as a complement to existing ris
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