The Basel III leverage ratio indicates the extent to which a bank’s activities are financed by Tier 1 capital rather than debt. It is calculated against total exposure and stated as a percentage, without applying risk weights to the underlying assets or other exposures. This makes the ratio less sensitive to differences in estimated credit or market risk than conventional capital ratios. A minimum threshold limits the amount of balance-sheet expansion that can occur at a given level of capital and acts as a safeguard alongside risk-based prudential requirements.
Source: European Central Bank (ECB) (source). This glossary entry is an independently worded adaptation of the cited information.