What is the Basel leverage ratio, and why is it needed alongside risk-weighted capital ratios?

The leverage ratio is a non-risk-based capital measure: Tier 1 capital divided by total exposure (on-balance-sheet assets plus off-balance-sheet exposures, derivatives, and SFTs, with limited netting), required above a minimum (3%, higher for global systemically important banks via a buffer). It deliberately ignores risk weights. It's needed alongside the risk-weighted ratios because RWAs depend on models and risk weights that can be gamed or simply wrong — a bank can pile into 'low-risk-weight' assets (sovereigns, certain mortgages) and look well-capitalized on a risk-weighted basis while being highly leveraged in absolute terms, as happened pre-2008. The leverage ratio is a simple, hard backstop: it caps total leverage regardless of how risky the assets are claimed to be, constrains model risk and RWA optimization, and is harder to manipulate. The two work together — the risk-weighted ratio for risk sensitivity, the leverage ratio as a non-risk floor — so neither can be defeated alone.