economics hard Fill in the Blank

To address the risk of excessive leverage that risk-based capital ratios might miss, Basel III introduced a non-risk-based ___ Ratio, calculated as Tier 1 Capital divided by the bank's total consolidated exposure.

  1. NPCI (or National Payments Corporation of India)
  2. Leverage
  3. multiplier
  4. National Income

Answer: Leverage

During the 2008 financial crisis, many banks maintained healthy risk-based capital ratios while simultaneously taking on massive, hidden leverage through off-balance-sheet vehicles. The Leverage Ratio acts as a strict backstop, limiting the overall degree to which a bank can multiply its equity through borrowing, regardless of how 'safe' the underlying assets are rated.

Topic Banking - Regulation
Exam Relevance Banking, UPSC Prelims
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