LEVERAGE RATIO

About:

• Meaning: The leverage ratio, as defined under Basel-III norms, is Tier-I capital as a percentage of the bank’s exposures. The framework is designed to capture leverage associated with both on- and off-balance sheet exposures.
  
  
• Total exposure: In this case, a bank’s total exposure is defined as the sum of the following exposures: on-balance sheet exposures; derivative exposures; securities financing transaction exposures; and off-balance sheet items.
  
  
• Background:
  • The leverage ratio was introduced for banks post the financial crisis of 2008, as one of the underlying features of the crisis was the build-up of excessive on- and off-balance sheet leverage in the banking system.
    
    
  • The Basel Committee on Banking Supervision (BCBS) has set the minimum requirement for leverage ratio at 3%.
    
    
  
  
  

Recent decision:

• In the second bi-monthly policy review, the Reserve Bank of India (RBI) has mandated leverage ratio of 3.5% for all the banks except for the domestic systemically important banks (D-SIBs), which will have a 4% ratio.
  
  
• According to bankers, the RBI’s decision to lower leverage ratio for banks in line with Basel-III standards may improve lending activity.