Tier 1 Leverage Ratio

Tier 1 Leverage Ratio: Definition, Formula, and Key Points

Key takeaways
* The Tier 1 leverage ratio compares a bank’s Tier 1 capital to its total consolidated assets to assess leverage and near‑term financial resilience.
* Formula: Tier 1 Leverage Ratio = (Tier 1 Capital / Consolidated Assets) × 100.
* Regulators generally view a ratio above 5% as a sign of strong capitalization; Basel III set a 3% minimum, with higher buffers applied to large or troubled institutions.

What it measures

The Tier 1 leverage ratio gauges how much core capital a bank holds relative to its total assets. Tier 1 capital is the most loss-absorbing capital (common equity, retained earnings, disclosed reserves, and certain other instruments). The ratio is a non–risk-weighted measure that indicates a bank’s ability to withstand short‑term shocks to its balance sheet.

Formula and calculation

Tier 1 Leverage Ratio = (Tier 1 Capital / Consolidated Assets) × 100

How to calculate:
1. Use Tier 1 capital (common equity, retained earnings, reserves, plus qualifying additional Tier 1 instruments) as the numerator.
2. Use total consolidated assets (including certain derivative and off‑balance‑sheet exposures required by regulation) as the denominator.
3. Divide, then multiply by 100 to express the result as a percentage.

Example:
* Tier 1 capital = $186.189 billion
Total consolidated assets = $2.240 trillion
Ratio = ($186.189B / $2,240B) × 100 ≈ 8.3%

Components and scope

• Tier 1 capital: CET1 (Common Equity Tier 1) plus additional Tier 1 (AT1) instruments.
• Consolidated assets/exposures: on‑balance‑sheet assets plus specified derivative and off‑balance‑sheet items (e.g., loan commitments, standby letters of credit) per regulatory rules.

Regulatory requirements and common thresholds

• Basel III set a minimum leverage ratio of 3% but allows higher national standards.
• U.S. regulators (Fed, OCC, FDIC) imposed higher leverage requirements for very large bank holding companies. For example:
• Bank holding companies with more than $700 billion in consolidated assets (or $10 trillion in assets under custody/management) face an additional 2% buffer, effectively a 5% minimum.
• Insured depository institutions subject to corrective action must demonstrate at least a 6% leverage ratio to be considered well‑capitalized.

Tier 1 Leverage Ratio vs. Tier 1 Capital Ratio

• Tier 1 leverage ratio uses total consolidated assets (non‑risk‑weighted).
• Tier 1 capital ratio (often cited within Basel rules) compares Tier 1 capital to risk‑weighted assets, so it accounts for differing credit and operational risk profiles across asset types.
• Both measure capital adequacy but answer different questions: leverage exposure versus capital relative to risk.

CET1 vs. Tier 1 Leverage Ratio

• CET1 (Common Equity Tier 1) is a subset of Tier 1 capital made up primarily of common equity and retained earnings.
• The CET1 ratio compares CET1 to risk‑weighted assets; the leverage ratio compares total Tier 1 capital to total assets.

Limitations

• The ratio is non‑risk‑weighted, so it treats low‑ and high‑risk assets the same and can miss differences in asset quality.
• It depends on accurate bank reporting of capital and assets; misreporting or accounting differences can distort comparisons.
• A leverage ratio above regulatory minimums signals capital buffer size but does not guarantee resilience against all types of stress.

Typical values

A leverage ratio above 5% is commonly viewed as strong. Example figures (Q1 2023 reported levels) include:
* Citibank: 8.82%
* JPMorgan Chase: 8.60%
* Wells Fargo: 8.55%
* Bank of America: 7.88%

Conclusion

The Tier 1 leverage ratio is a straightforward, regulator‑used metric that compares a bank’s core capital to its total assets to assess leverage and short‑term resilience. It complements risk‑weighted capital ratios but should be interpreted alongside other measures of capital adequacy and asset quality.