A requirement under Basel III regulations for regulated institutions to hold a minimum ratio of capital to absolute balance sheet outstandings (plus certain other items).
It is calculated as:
LR = Tier 1 capital / Leverage Ratio Exposure (LRE)
The leverage ratio is the long term capital ratio for banks by which their Tier 1 capital should in due course be at least 5% of their assets.
This will generally be that their shareholders funds will be >=5% of their loans although the definitions may be subject to domestic practices.
Domestic regulators can set higher ratios and the USA has set higher ratios for eight Systemically Important Financial Institutions (SIFIs) than for non-SIFIs.
This requirement is intended to be implemented progressively by 1 January 2019.
The initial minimum Basel III requirement was set at 3%, for periods to the end of 2016.
Leverage Ratio Exposure
The Leverage Ratio Exposure (LRE) - for the purposes of calculating the Leverage Ratio - includes certain other risk exposures, in addition to on-balance sheet assets.