The leverage ratio requirement is designed to function as a sort of safeguard against weaknesses entailed in conventional risk-weighted capital requirements. The two types of requirements support each other effectively.
According to Article 92(1)(d) of Regulation (EU) No 575/2013 (the Capital Requirements Regulation, CRR), financial undertakings’ leverage ratio shall be a minimum of 3%.
The leverage ratio is calculated as the relevant institution’s Tier 1 capital divided by its total exposure measure (non-risk-weighted assets).
Leverage ratio (%) =
Tier 1 capital / Total exposure measure
More detailed provisions on the leverage ratio and its calculation can be found in Part Seven of the CRR.
| Leverage ratio | Minimum |
|---|---|
Financial undertakings | 3% |
If the Central Bank of Iceland is of the opinion that a financial undertaking is at risk of excessive leverage, it may require a leverage ratio higher than the 3% minimum (Pillar II-R – LR). Furthermore, the Bank may announce a Pillar II guidance if it is of the opinion that the undertaking is at risk of excessive leverage under stressed conditions (Pillar II-G – LR).