[Solved] Which of the following statements about the leverage ratio under Basel III is correct? — Ans: It is the ratio of Tier 1 Capital to total exposure without risk weighting | Financial Awareness

Financial Awareness - Risk, Stability & Emerging Finance

Which of the following statements about the leverage ratio under Basel III is correct?

AIt is the ratio of Tier 1 Capital to total exposure without risk weighting

BIt is the ratio of total capital to risk-weighted assets

CIt is the ratio of Tier 2 Capital to risk-weighted assets

DIt is the ratio of cash reserves to total deposits

Step-by-Step Solution

Step 1: Understand leverage ratio concept
Leverage ratio is a non-risk based measure introduced in Basel III to restrict excessive leverage.
Step 2: Analyze definition
It is calculated as Tier 1 Capital divided by total exposure (on- and off-balance sheet) without risk weighting.
Step 3: Evaluate options
Only the option describing Tier 1 Capital to total exposure without risk weighting is correct.
Step 4: Explain incorrect options
Ratio of total capital to risk-weighted assets is CAR, not leverage ratio; Tier 2 Capital is not used; cash reserves to deposits is unrelated.
Final Answer:
It is the ratio of Tier 1 Capital to total exposure without risk weighting → Option A
Quick Check:
Leverage ratio = Tier 1 Capital ÷ total exposure (no risk weights) ✅

Quick Trick: Leverage ratio ignores risk weights, unlike CAR

Common Mistakes:

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