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Leverage ratio: Difference between revisions
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{{ | {{a|crr|}}{{d|{{PAGENAME}}|/rˈliːvərɪʤ ˈreɪʃɪəʊ /|n}} | ||
Unlike [[leveraged alpha]] or the verb [[leverage]], | Unlike [[leveraged alpha]] or the verb [[leverage]], leverage ratio actually means something. | ||
Per the [[BIS]] Working Paper No. 586: [https://www.bis.org/publ/work586.pdf Leverage and Risk Weighted Capital Requirements]: | |||
The global financial crisis highlighted the limitations of [[risk-weighted assets|risk-weighted]] bank [[capital ratio]]s ([[regulatory capital]] divided by [[risk-weighted assets]]). Despite refinements over two decades, the weights applied to asset categories did not fully reflect banks’ [[portfolio risk]], in turn increasing [[systemic risk]]. To tackle this problem [[Basel III]] introduced a [[minimum leverage ratio]], defined as a [[bank]]’s [[tier 1 capital]] over an exposure measure which is independent of any risk assessment. | The global financial crisis highlighted the limitations of [[risk-weighted assets|risk-weighted]] bank [[capital ratio]]s ([[regulatory capital]] divided by [[risk-weighted assets]]). Despite refinements over two decades, the weights applied to asset categories did not fully reflect banks’ [[portfolio risk]], in turn increasing [[systemic risk]]. To tackle this problem [[Basel III]] introduced a [[minimum leverage ratio]], defined as a [[bank]]’s [[tier 1 capital]] over an exposure measure which is independent of any risk assessment. | ||
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:''An underlying cause of the global financial crisis was the build-up of excessive on- and off-balance sheet [[leverage]] in the banking system. In many cases, banks built up excessive leverage while apparently maintaining strong risk-based capital ratios. At the height of the crisis, financial markets forced the banking sector to reduce its leverage in a manner that amplified downward pressures on asset prices. This deleveraging process exacerbated the feedback loop between losses, falling bank capital and shrinking credit availability.'' | :''An underlying cause of the global financial crisis was the build-up of excessive on- and off-balance sheet [[leverage]] in the banking system. In many cases, banks built up excessive leverage while apparently maintaining strong risk-based capital ratios. At the height of the crisis, financial markets forced the banking sector to reduce its leverage in a manner that amplified downward pressures on asset prices. This deleveraging process exacerbated the feedback loop between losses, falling bank capital and shrinking credit availability.'' | ||
{{Sa}} | |||
*[[Leverage ratio denominator]] | *[[Leverage ratio denominator]] | ||
*[[Risk-weighted assets]] | *[[Risk-weighted assets]] | ||