$\begin{array}{lccc}
\text { Securities (at par) } & \text { \$ 250 Deposits}& \$975 \
\text { Loans (at par)} & \text { \$ 760 Capital} & \$ 35
\end{array}$
How would regulators characterize this FI based on the Standardized Approach leverage ratio zones of Basel III?

Question

$\begin{array}{lccc}
  \text { Securities (at par) } & \text { \$ 250  Deposits}& \$975  \
 \text { Loans (at par)} &    \text {  \$ 760  Capital} & \$ 35
\end{array}$
 How would regulators characterize this FI based on the Standardized Approach leverage ratio zones of Basel III?

Quizplus · Accepted Answer

The Standardized Approach leverage ratio zones of Basel III classify FIs based on their leverage ratio. Leverage ratio is the ratio of Tier 1 capital to the total exposure (sum of on-balance sheet assets, derivatives, securities financing transactions, and off-balance sheet items).

Based on the given information, the Tier 1 capital of the FI is \$35 and the total exposure is \$250 + \$975 + \$760 = \$1985. Therefore, the leverage ratio is calculated as:

Leverage ratio = Tier 1 capital / Total exposure = \$35 / \$1985 = 0.0176 or 1.76%

As per the standardized approach leverage ratio zones of Basel III, an FI with a leverage ratio of less than 3% is considered undercapitalized. Therefore, the FI in this case is undercapitalized.

How Would Regulators Characterize This FI Based on the Standardized