A primary lesson from the 2008 financial crisis was that banks could manipulate risk-weighted asset models to understate their actual risk exposures, allowing them to build dangerous levels of leverage. To address this vulnerability, Basel III introduced a non-risk-based backstop: the Leverage Ratio.

The leverage ratio treats all exposures equally, ignoring risk-weightings to establish a clean boundary on overall corporate debt. The plain-text regulatory formula requires:

Leverage Ratio = Tier 1 Capital / Total Exposure Measure

The ratio must remain equal to or greater than 3.0% for standard institutions. The Total Exposure Measure incorporates both on-balance sheet assets and off-balance sheet commitments (like derivatives and unused credit lines), ensuring banks maintain a baseline equity cushion regardless of their internal risk weight calculations.