The leverage ratio · RiskAtoms Academy

By the end you will be able to

1Build the leverage exposure measure: on-balance sheet assets, derivatives at 1.4 × (RC + PFE), securities financing and off-balance sheet items through their conversion factors.
2State Basel's 3% minimum and the G-SIB leverage buffer, and how the EU and US apply them.
3Explain the UK framework: 3.25% without central bank reserves, the buffers, the scope test, and why RiskAtoms Bank plc is out of scope.
4Find the RWA density at which leverage binds, and explain why the leverage ratio is a backstop.

Why it matters

Add £10bn of gilts to RiskAtoms Bank plc's balance sheet. Its risk-weighted assets do not move: UK government bonds weigh 0%. Its CET1 ratio stays at 13.24%. But the bank is now 14% bigger, and if it were in scope of the UK leverage ratio that rule would now ask for more Tier 1 than every risk-based rule together. The leverage ratio does not care what the assets are. That is the point of it.

Core explanation

Capital against size, not risk

A backstop

L1.8.06: Capital, equity and leverage met leverage as assets over equity. Basel's leverage ratio turns it round: Tier 1 capital over an exposure measure, with a minimum of 3% (LEV20.4, LEV20.7). Risk weights come from models and from rules that can be wrong, and before 2008 banks built up huge balance sheets of assets that the rules said were nearly riskless. A ratio with no risk weights is a backstop: it binds only when the risk weights are low.

Illustrative dataRiskAtoms Bank plc's capital book

The same made-up UK bank as Level 3: £67bn of assets and £4bn of equity at 31 December 2025, in £ millions. Module 4.1 adds its regulatory layer: own funds, deductions, risk-weighted assets by risk type, buffers, the leverage exposure and MREL, computed from the Level 3 credit, trading, derivatives and operational risk books. Every figure is illustrative, not any bank's data.

Pro forma. The book applies Basel 3.1, the 2017 finalisation of Basel III, to the 31 December 2025 balance sheet. On that date the bank still reported under the old UK CRR. The UK applies Basel 3.1 from 1 January 2027, and the internal model approach for market risk from 1 January 2028 (PRA PS1/26, paras 1.23 and 1.24). So the book shows the bank as it would look under the new rules.

The exposure measure

Four parts (LEV20.5), each with its own rule:

Part	How it is measured	RiskAtoms Bank plc
On-balance sheet	Accounting value, less assets deducted from Tier 1. Collateral received does not reduce it.	£63,410m
Derivatives	1.4 × (replacement cost + potential future exposure), with the PFE multiplier set to 1 (LEV30.14 to 30.16)	£43.0m
Securities financing	Gross SFT assets, plus a charge for counterparty credit risk: exposure less collateral, if positive	£3,000m
Off-balance sheet	Notional × the standardised credit conversion factor (LEV30.52 to 30.55)	£4,000m
Exposure measure		£70,453m

Tier 1 is £3,419.9m, so the ratio is 4.85%: well above 3%. The derivatives line is small because the bank's four counterparties are mostly margined. How the replacement cost and PFE are built is L4.4.01: SA-CCR: replacement cost and the multiplier; netting sets are L3.4.04: Netting.

Sort itHow does it count?

Where does each item go in Basel's exposure measure?

A £200m portfolio of mortgages
£1bn of gilts held for liquidity
Goodwill of £500m
An interest rate swap with a pension scheme
An undrawn £50m credit line to a company
A reverse repo lending £100m against gilts

When does leverage bind?

Both rules ask for Tier 1. The risk-based rules ask for a rate of RWA; leverage asks for a rate of exposure. Which is bigger depends on the RWA density, RWA per pound of exposure. Against the bare 6% Tier 1 minimum, 3% leverage binds below a density of 50%. Against everything RiskAtoms Bank plc must hold in Tier 1 terms (12.375% of RWA with Pillar 2A and buffers), it binds below 24.2%. The bank's density is 32.4%.

Risk-based

£2,822m

Basel leverage

£2,114m

UK leverage, if in scope

£2,550m

Tier 1 held: £3,420m

Tier 1 each rule asks for, £m. The dashed line is the £3,420m the bank holds. The UK line is 3.25% plus a 0.70% buffer on the UK measure.

Mortgage lenders and banks with large liquid asset books have low densities and are the first to be bound by leverage. The output floor (L4.1.04: Risk-weighted assets) works from the other side, by putting a lower bound on RWA; between them, both close the gap that low modelled risk weights open.

The UK framework

The UK sets a minimum of 3.25% of an exposure measure that leaves out claims on central banks matched by liabilities in the same currency (SS45/15, 1.A.2). Basel allows such an exclusion only in exceptional circumstances, with a higher minimum to offset it (LEV30.7); the UK's 3.25% is that offset. In-scope firms also hold a countercyclical leverage buffer and, if systemic, an additional leverage buffer, both at 35% of the matching risk-based rate.

Not every bank is in scope. Since 1 January 2026 the threshold is retail deposits of £75bn, on a three-year average (£50bn before), or non-UK assets of £10bn (PRA PS22/25). RiskAtoms Bank plc:

Test	Threshold	The bank	In scope?
Retail deposits	£75bn (£50bn before 2026)	£38.0bn	No
Non-UK assets	£10bn	£3.5bn	No

Out of scope is not out of mind. The PRA expects firms outside the framework to manage their leverage so that their ratio, on the UK measure, would not ordinarily fall below 3.25%, and to tell it if it might (SS45/15, chapter 5). The bank's UK ratio is 5.30%.

The formal version

The ratio and its exposure measure (LEV20.4 to 20.7, LEV30):

\begin{aligned} \text{LR} &= \frac{\text{Tier 1}}{E} \ \ge\ 3\% \\ E &= \underbrace{(A - A_{\text{deriv}} - A_{\text{SFT}} - D)}_{\text{on-balance}} + \underbrace{1.4\,(\text{RC} + \text{PFE})}_{\text{derivatives}} + \underbrace{A_{\text{SFT}} + \max(0,\ E_{\text{SFT}} - C_{\text{SFT}})}_{\text{SFTs}} + \underbrace{\textstyle\sum_i \text{CCF}_i\,N_i}_{\text{off-balance}} \\ E_{\text{UK}} &= E - \text{central bank claims} \qquad (\text{SS45/15, 1.A.2}) \end{aligned}

The new idea is the break-even density. With a risk-based Tier 1 rate $r$ and a leverage rate $\lambda$ :

\begin{aligned} d^{*} &= \frac{\lambda}{r} = \frac{3\%}{12.375\%} = 24.2\% \quad (\text{Basel}) \\ d^{*}_{\text{UK}} &= \frac{3.25\% + 35\% \times 2\%}{12.375\%} = \frac{3.95\%}{12.375\%} = 31.9\% \\ d_{\text{bank}} &= \frac{22{,}807.7}{70{,}453.0} = 32.4\%, \qquad \frac{\text{RWA}}{E_{\text{UK}}} = 35.3\% \end{aligned}

Leverage binds when the density is below $d^*$ . Percentages of percentages: see M-A01: Percentages. £ millions.

Try it

Grow the balance sheet with one kind of asset, funded by deposits. Which rule asks for the most Tier 1? Try gilts, then reserves at the Bank of England, then mortgages, and watch the density. The output floor binds at every point, for every kind of asset, so RWA are 72.5% of standardised RWA throughout. What does that mean for the risk-based Tier 1 need when you add mortgages, whose models weigh them far below the standardised approach?

Try itWhich rule binds?

Add assets of this kind, funded by deposits

Amount added£10.0bn

Per £1: modelled RWA 0.0%, standardised 0.0%.

Risk-based: Tier 1 minimum, Pillar 2A and buffers (12.38%)

£2,822m

Basel leverage: 3% (3.00%)

£2,414m

UK leverage, if in scope: 3.25% + 35% of the CCyB (3.95%)

£2,945m

Tier 1 held: £3,420m

Binding ruleUK leverage

RWA density28.3%

RWA after the output floor£22,808m

Output floor bindsyes

CET1 ratio13.24%

Leverage ratio, Basel4.25%

Leverage ratio, UK measure4.59%

Tier 1 to spare over the binding rule£475m

Capital stays at £3,420m of Tier 1. The risk-based line is Tier 1 for Pillar 1 and Pillar 2A plus the combined buffer; the UK line is 3.25% plus a countercyclical leverage buffer of 35% of the 2% CCyB, and applies only to firms in scope, which this bank is not. RWA are the larger of modelled RWA and 72.5% of standardised RWA. Illustrative data, £ millions.

Worked example

RiskAtoms Bank plc's exposure measure

From the balance sheet to the leverage ratio, £ millions.

Building the exposure measure

Step 1 of 7

1
On-balance sheet
$67{,}000 - \underbrace{60}_{\text{derivatives}} - \underbrace{3{,}000}_{\text{reverse repo}} - \underbrace{530}_{\text{deducted from Tier 1}} = 63{,}410$
Derivatives and SFTs are taken out to be measured their own way. The deductions are goodwill (£500m) and the deferred tax asset on losses (£30m), which Tier 1 already excludes.

Regulatory lens

Basel's leverage standard is LEV. G-SIBs add a leverage buffer of half their G-SIB buffer rate from 1 January 2023 (LEV40.1, LEV40.2, LEV90.1): a bucket 3 bank, at 2.0%, needs 4.0%. As at 3 November 2026 as at 3 Nov 2026.

In the UK

Firms in scope need 3.25% of the UK measure, at least 75% of it in CET1, plus a countercyclical leverage buffer of 35% of their CCyB rate and, for systemic banks, an additional buffer of 35% of their G-SII or O-SII rate (SS45/15, 1.A.2 and 2.A to 2.C). In July 2026 the FPC proposed a package: remove the countercyclical leverage buffer, lower the minimum to 3%, add a general leverage buffer of 0.25% and raise the additional buffer to 50% of the systemic rate, about 20 basis points lower in aggregate (FPC Record, July 2026, paras 34 to 45). In September 2026 it agreed to proceed, and the Bank expected to consult in early 2027 (FPC Record, September 2026, para 35). Until then, the rules above apply.

In the EU

The CRR sets a 3% leverage ratio alongside the risk-based minimums (Article 92(1)(d)), and G-SIIs add a leverage buffer of 50% of their G-SII buffer rate (Article 92(1a)). There is no UK-style scope test: it applies to every institution.

In the US

US banks face two leverage rules: a 4% Tier 1 leverage ratio on balance sheet assets, and, for the largest, a 3% supplementary leverage ratio on a Basel-style measure (12 CFR 217.10). The largest banks also carry an enhanced SLR. A final rule of 1 December 2025 recalibrated it to 3% plus 50% of the method 1 G-SIB surcharge, capped at 1% for the deposit-taking subsidiaries, replacing a fixed 2% buffer for holding companies and a 6% well-capitalised level for their banks. It took effect on 1 April 2026, with early adoption allowed from 1 January 2026.

Spark Atoms

Spark AtomZero risk, full cost

£10bn of gilts adds nothing to RWA and £395m to the UK leverage requirement, if the bank were in scope. Put the same £10bn in reserves at the Bank of England instead and the UK measure does not move: reserves are left out. Banks' choices between gilts and reserves shift with the rule.

Spark AtomCloser than it looks

On the UK measure the bank's density is 35.3%, against a break-even of 31.9%. A mortgage bank with a little more in liquid assets would be leverage-bound today. That is why the UK limits the framework to large banks, and why the PRA watches the rest.

Key takeaways

The leverage ratio is Tier 1 over an exposure measure with no risk weights. Basel's minimum is 3%, plus half the G-SIB buffer rate for G-SIBs.
The exposure measure adds on-balance sheet assets (less Tier 1 deductions), derivatives at 1.4 × (RC + PFE), SFTs gross with a counterparty charge, and off-balance sheet items through their CCFs.
RiskAtoms Bank plc's exposure is £70.5bn and its leverage ratio 4.85%; 5.30% on the UK measure, which leaves out £5.9bn of reserves.
The UK sets 3.25% plus buffers for banks with £75bn of retail deposits or £10bn of non-UK assets. The bank, at £38bn and £3.5bn, is out of scope.
Leverage binds when the RWA density is below the leverage rate divided by the risk-based rate: a backstop for low risk weights.

Reaction

Check what stuck

Question 1 · objective 1

A bank has Tier 1 capital of £3bn and a leverage exposure measure of £80bn. What is its leverage ratio, in %?

%

Question 2 · objective 1

A bank has £5bn of undrawn committed credit lines to companies (40% CCF) and £2bn of card limits it can cancel at any time (10% CCF). What do they add to the exposure measure, in £m?

£m

Question 3 · objective 1

A netting set of derivatives has a replacement cost of £10m and a potential future exposure of £20m (multiplier 1). What does it add to the exposure measure, in £m?

£m

Question 4 · objective 3

Why does the UK leave central bank reserves out of its leverage exposure measure?

ASo that the ratio does not penalise banks for holding the reserves that the central bank creates, for example through quantitative easingBBecause reserves carry a 0% risk weightCBecause reserves are already deducted from Tier 1DBecause Basel requires every country to leave them out

Question 5 · objective 4

A bank needs Tier 1 of 12% of RWA under the risk-based rules and 3% of its exposure measure under leverage. Below what RWA density does leverage bind, in %?

%

Glossary

Leverage ratio: Tier 1 capital divided by the exposure measure. Basel's minimum is 3% (LEV20.7).
Exposure measure: The leverage ratio's denominator: on-balance sheet assets, derivatives, securities financing transactions and off-balance sheet items, with no risk weights (LEV20.5).
Backstop: A simple rule that catches what the risk-based rules miss: model error, low risk weights that turn out wrong, and balance sheets that grow in assets that look safe.
RWA density: RWA divided by the leverage exposure measure: how risky, on the rules' own reckoning, each pound of exposure is.
SA-CCR (for leverage): The standardised approach for counterparty credit risk: exposure = alpha × (replacement cost + potential future exposure), with alpha = 1.4. For leverage the PFE multiplier is set to 1 (LEV30.16).
Securities financing transaction: Securities financing transaction: a repo, reverse repo, securities loan or margin loan.
Credit conversion factor: Credit conversion factor: the share of an undrawn commitment counted as exposure. For leverage Basel uses the standardised approach's factors, such as 40% or 10% (LEV30.52 to 30.55).
G-SIB leverage buffer: A leverage buffer for G-SIBs equal to 50% of the bank's risk-based G-SIB buffer rate (LEV40.1, LEV40.2).
Countercyclical leverage ratio buffer: Countercyclical leverage ratio buffer: in the UK, 35% of the bank's countercyclical capital buffer rate, held in CET1 (SS45/15, 2.B).
Additional leverage ratio buffer: Additional leverage ratio buffer: in the UK, 35% of a G-SII's or O-SII's systemic buffer rate, held in CET1 (SS45/15, 2.C).
Central bank claims exclusion: In the UK measure, claims on central banks are left out if they are matched by liabilities in the same currency of identical or longer maturity (SS45/15, 1.A.2).

Deep Dives & Origins

Deep Dives

Prudential Regulation Authority, SS45/15 The UK leverage ratio framework, November 2025: the UK rules and what the PRA expects of firms outside them. Intermediate.
Financial Policy Committee, Record, July 2026, paras 34 to 45: the case for simplifying the UK leverage buffers. Advanced.

Origins

Basel Committee on Banking Supervision, LEV20: Calculation, paras 20.4 to 20.7; LEV30: Exposure measurement, paras 30.7, 30.14 to 30.16 and 30.52 to 30.55; LEV40: G-SIB buffer, paras 40.1 to 40.5; LEV90.1, bis.org.
Prudential Regulation Authority, SS45/15 The UK leverage ratio framework, November 2025, paras 1.A.2, 2.A to 2.C and 5.1 to 5.4.
Prudential Regulation Authority, PS22/25, 12 November 2025: the leverage ratio scope thresholds.
Financial Policy Committee, Records, December 2025 (paras 33 and 34), July 2026 (paras 34 to 45) and September 2026 (para 35).
Regulation (EU) No 575/2013 (CRR), Article 92(1) and (1a), as amended by Regulation (EU) 2024/1623.
12 CFR 217.10; final rule on the enhanced supplementary leverage ratio, 90 FR 55248, 1 December 2025.

Watch this lesson

Video version

Prefer to watch? The same lesson as a 12-minute video will sit here, made from this page's script.