[Solved] Which of the following statements about the leverage ratio under Basel III is correct? — Ans: It is a non-risk based measure to limit excessive leverage | Financial Awareness

Financial Awareness - Risk, Stability & Emerging Finance

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

AIt is a risk-weighted capital ratio

BIt is a non-risk based measure to limit excessive leverage

CIt replaces the Capital Adequacy Ratio

DIt applies only to operational risk

Step-by-Step Solution

Step 1: Understand leverage ratio nature
The leverage ratio under Basel III is designed as a backstop to risk-weighted capital ratios.
Step 2: Analyze its characteristics
It is a non-risk based measure calculated as Tier 1 capital divided by total exposure, limiting excessive borrowing.
Step 3: Eliminate incorrect options
It does not replace CAR, nor is it risk-weighted or specific to operational risk.
Final Answer:
It is a non-risk based measure to limit excessive leverage → Option B
Quick Check:
Leverage ratio = Non-risk based limit on leverage ✅

Quick Trick: Leverage ratio limits total exposure, not risk-weighted assets.

Common Mistakes:

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