Tier 1 Leverage Ratio

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What is the 'Tier 1 Leverage Ratio'

The Tier 1 leverage ratio is the relationship between a banking organization's core capital and total assets. The Federal Reserve develops capital adequacy guidelines for bank holding companies. The Tier 1 leverage ratio is calculated by dividing Tier 1 capital ratio by the firm's average total consolidated assets. The Tier 1 leverage ratio is an evaluative tool used to help determine the capital adequacy and to place constraints on the degree to which a banking firm can leverage its capital base.

BREAKING DOWN 'Tier 1 Leverage Ratio'

Strong bank holding companies, rated composite 1 under the BOPEC (Bank subsidiaries, Other subsidiaries, Parent, Earnings, Capital) rating system of bank holding companies, must have a Tier 1 leverage ratio of 3%. For all other banks, the minimum ratio is 4%. Any banking organizations that have supervisory, financial, operational or managerial difficulties are expected to maintain capital ratios above the minimum levels. In addition, bank firms that are expecting or going through significant growth are expected to maintain ratios well above the minimum levels as a hedge against risk.

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RELATED FAQS
  1. How can I calculate the leverage ratio using tier 1 capital?

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  2. What is the difference between tier 1 capital and tier 2 capital?

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  3. How can I calculate the tier 1 capital ratio?

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  4. What does it mean when a company has a high capital adequacy ratio?

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  5. What measures can be used to evaluate the capital adequacy of a bank?

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