Capital
Tier 1 Leverage Ratio
Also known as Leverage Ratio
The Tier 1 Leverage Ratio measures Tier 1 capital against average total assets — unlike the risk-based capital ratios, it does not weight assets by their risk. It is the simple backstop that prevents banks from gaming the risk-based system.
Formula
Average Total Consolidated Assets is the quarterly average of month-end total assets, less deductions corresponding to those removed from Tier 1 (goodwill, certain DTAs, MSAs above limits). Unlike RWA, every dollar of asset counts equally.
Why it matters
The leverage ratio prevents the situation where a bank can show 12% CET1 but be 50× levered on a simple-asset basis because most of its assets are low-risk-weighted government securities. The minimum is 4% for most banks; G-SIBs face a 5% supplementary leverage ratio (SLR) that includes off-balance-sheet exposures.
How to interpret
Most US community banks report leverage ratios between 8% and 12%. Ratios below 5% warrant attention — the bank is heavily levered and thinly capitalized in absolute terms regardless of asset mix. The metric is most useful as a comparison to CET1: a wide gap (e.g., 15% CET1 vs 6% leverage) indicates an asset mix tilted toward low-risk-weighted securities or government-backed loans.
Thresholds
| Range | Label | Interpretation |
|---|---|---|
| ≥ 9% | Well capitalized | Comfortable simple-leverage cushion. |
| 6–9% | Adequate | Normal range for community banks. |
| 4–6% | Watch | Within regulatory minimums but limited cushion. |
| < 4% | Concern | Below 4% minimum — triggers PCA. |
Worked example
Frequently asked
Why have both leverage and risk-based capital ratios?
Risk-based capital correctly differentiates between holding $1 billion of US Treasuries vs $1 billion of subprime credit card receivables. Leverage prevents gaming the risk weights — both checks together prevent both undercapitalized risk-takers and reckless leverage stackers.
Are mortgage servicing rights in the leverage calculation?
Most mortgage servicing assets are deducted from Tier 1 capital up to threshold limits, so they're effectively excluded from both the numerator and (proportionally) the denominator.
Sources
- FFIEC Call Report Schedule RC-R Part I, Item 39
- 12 CFR Part 217 Subpart B
See Leverage Ratio across 4,394 US banks
BankRegReports ranks every FDIC-insured institution by Leverage Ratio, refreshed quarterly within 48 hours of FFIEC release.