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Ambigous terms - leverage ratio

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Basel III defines a leverage ration as Total Capital / Total Exposure which should be no more than 3%. Malz defines the leverage ratio of a firm as 1+(Debt/Equity). Is there a more proper name for the leverage ratio Malz defines ?

David Harper CFA FRM

David Harper CFA FRM
Staff member
Hi @afterworkguinness It's true, the definition of leverage ratio superficially differs. Malz's definition of assets/equity (or debt/equity) is consistent with finance (eg, CFA). Basel III's leverage ratio is essentially the inverse (ie, equity/assets; although equity is regulatory tier 1 capital rather than book capital), but the reason I imagine is that it's consistent with the format of the regular Basel ("Cooke") rate: they express regulatory capital requirement as 8.0% of risk-weighted assets (RWA), the didn't really cast Basel II in terms of "RWA of 12.5x regulatory capital." I am not aware of widespread consistency in terminology with respect to "leverage." I like to use CFA curriculum to arbitrate because it's survived a lot of expert crowdsourcing, so to speak. And CFA defines "financial leverage" as Assets/Equity, agreeing with Malz. I hope that helps!