Sources of contingent leverage risk

2.1 Certain types of financing have a lower exposure measure value than other economically similar transactions in the calculation of the leverage ratio (and are therefore more capital-efficient) [This arises from the way the leverage ratio is calculated. The starting point for measuring exposures is to use their accounting values. Some regulatory adjustments are then made to ensure consistent outcomes between different accounting frameworks, and to better capture the inherent risks arising from exposures where accounting frameworks may not reflect such risks (e.g. credit derivatives, SFTs, off-balance sheet items).]. Contingent leverage risk arises when a firm can no longer rely on these capital-efficient forms of financing, for example in a stress. The crystallisation of this risk could lead to a fall in a firm's leverage ratio, tightening its capital constraint, and leading to a potentially destabilising deleveraging process or a breach in capital requirements. The resulting leverage ratio reduction could also adversely affect market confidence in the firm.