Reducing excess “leverage” in the banking sector is a key component of the Basel III capital standards. “Leverage” for these purposes means the ratio between a bank’s non-risk-weighted assets and its capital. The ratio is intended to be a hard backstop against the risk-based capital requirements and is also designed to constrain excess leverage, which was common amongst many banks pre-crisis. Banks will be required to hold Tier 1 capital of at least 3% of their non-risk weighted assets but some of the stricter elements of the 2013 proposal have been relaxed.
View full memo, Basel III Framework: The Leverage Ratio