Tier 1 Leverage Ratio: Formula, 4% Minimum, and Variants

The Tier 1 leverage ratio is a bank’s core capital divided by its average total consolidated assets, expressed as a percentage. In the United States, most banks must keep that figure at 4% or higher to be considered adequately capitalized, and at 5% or higher to be considered well capitalized. Unlike risk-based capital rules, the leverage ratio treats every dollar of assets the same, whether it’s a Treasury bond or a speculative commercial loan.¹

How the Ratio Is Calculated

The formula has two parts. The numerator is Tier 1 capital, which is the most stable funding a bank holds. It includes common equity raised by issuing shares, retained earnings, accumulated other comprehensive income, and certain non-cumulative perpetual preferred stock, provided those instruments can absorb losses while the bank keeps operating.¹

Not everything on the balance sheet counts. Regulators require banks to subtract items that look valuable on paper but wouldn’t be available to absorb losses in a crisis. Goodwill, the premium a bank paid when acquiring another company, is the largest deduction. Some deferred tax assets also come out. Without these adjustments, a bank could pad its apparent cushion with intangibles that evaporate in a downturn.

The denominator is the bank’s average total consolidated assets as reported on its balance sheet.² Every loan, security, and dollar of cash reserves counts at full face value. Divide Tier 1 capital by that figure and you have the leverage ratio.³ A bank with $5 billion in Tier 1 capital and $100 billion in average assets has a 5% leverage ratio.

Why It Ignores Risk Weighting

The equal treatment of assets is deliberate. Under risk-based capital rules, a bank can hold less capital against assets its models classify as safe, so a portfolio of government bonds might require very little capital while a portfolio of commercial loans requires much more. The leverage ratio ignores those distinctions.

That rigidity catches a danger risk-based rules miss: a bank that loads up on assets it considers safe but that turn out not to be. The 2008 financial crisis showed exactly this problem when mortgage-backed securities rated as low-risk produced catastrophic losses. Banks must satisfy both leverage and risk-based requirements, and whichever demands more capital at a given moment governs how the bank manages its balance sheet.

The 4% U.S. Minimum

The Basel III framework, developed by the Basel Committee on Banking Supervision after the 2008 crisis, set a 3% leverage ratio floor for internationally active banks.⁴ U.S. regulators went higher and adopted a 4% minimum.² The preference for a thicker cushion predates Basel III; U.S. banks without strong supervisory ratings were already held to 4% before the international rules took effect.

Capital Categories and What Each One Triggers

Federal regulators sort banks into capital categories under the Prompt Corrective Action framework, and the leverage ratio is one of the metrics that determines placement.⁵ The consequences escalate sharply as the ratio falls:

Well capitalized (5% or above): the bank operates with minimal regulatory interference and has the broadest freedom to pay dividends, conduct business, and pursue acquisitions.⁶
Adequately capitalized (4% to just under 5%): the bank meets the minimum but faces limitations, including restrictions on accepting brokered deposits without a waiver.
Undercapitalized (below 4%): regulators restrict dividends, cap asset growth, and require a capital restoration plan within 45 days.⁷
Significantly undercapitalized (below 3%): all of the restrictions above apply, plus mandatory limits on executive compensation. The bank may be forced to raise capital or sell assets.⁸
Critically undercapitalized (tangible equity at or below 2% of total assets): the bank must generally be closed within 90 days, and the FDIC has authority to appoint itself receiver.⁹

The one-point gap between adequately capitalized and well capitalized matters. A bank sitting just above 4% has almost no room to absorb losses before regulatory intervention kicks in. Most banks aim comfortably above 5% because dipping below that line, even briefly, invites scrutiny and constrains capital returns to shareholders.

Variants for Larger and Smaller Banks

The 4% figure applies to most banks, but two variants of the leverage ratio apply at the ends of the size spectrum.p>

The Supplementary Leverage Ratio

The standard ratio counts only on-balance-sheet assets. For the largest and most complex banks, that leaves out derivatives, repurchase agreements, and undrawn credit lines. The supplementary leverage ratio (SLR) expands the denominator to capture those exposures.¹⁰ Banks in the Federal Reserve’s Categories I through III, generally those with $250 billion or more in total assets or significant international activity, must maintain an SLR of at least 3%.¹¹ Because the denominator is larger, hitting 3% on the SLR requires more capital in absolute terms than hitting 4% on the standard ratio.

The eight U.S. Global Systemically Important Banks face an enhanced version (the eSLR) with an added buffer. A final rule effective April 1, 2026, replaced the prior flat 2% buffer with one tailored to each institution: at the holding company level, the buffer equals 50% of the bank’s method 1 capital surcharge, and for subsidiary depository institutions of GSIBs, it’s the lesser of 1% or 50% of the parent’s method 1 surcharge.¹²

The Community Bank Leverage Ratio

At the other end, smaller banks can opt into a simplified framework. The Community Bank Leverage Ratio (CBLR) lets qualifying institutions meet a single leverage requirement and skip risk-based capital calculations entirely.¹³ To qualify, a bank must have less than $10 billion in total consolidated assets, off-balance-sheet exposures of 25% or less of those assets, and trading assets and liabilities of 5% or less. Effective July 1, 2026, the required CBLR is 8%, reduced from the previous 9%.¹⁴ A bank opts in through its Call Report filing, and if it temporarily falls out of compliance with one of the qualifying criteria, it has four consecutive quarters to return before it must go back to the full framework.¹⁵

1
Federal Deposit Insurance Corporation. Risk Management Manual of Examination Policies – Capital
2
eCFR. 12 CFR 3.10 – Minimum Capital Requirements
3
Bank for International Settlements. LEV20 – Calculation
4
Bank for International Settlements. Basel III Leverage Ratio Framework and Disclosure Requirements
5
Office of the Law Revision Counsel. 12 USC 1831o – Prompt Corrective Action
6
eCFR. 12 CFR 6.4 – Capital Categories
7
eCFR. 12 CFR 324.404 – Capital Restoration Plans
8
eCFR. 12 CFR 324.403 – Capital Measures and Capital Category Definitions
9
Federal Deposit Insurance Corporation. Insured Depository Institution Resolutions Handbook
10
Office of Financial Research. Banks’ Supplementary Leverage Ratio
11
eCFR. 12 CFR Part 217, Subpart B – Capital Ratio Requirements
12
Federal Register. Modifications to the Enhanced Supplementary Leverage Ratio Standards for US Global Systemically Important Bank Holding Companies
13
FDIC. Agencies Finalize Changes to Community Bank Leverage Ratio
14
Office of the Comptroller of the Currency. Regulatory Capital Rule – Revisions to the Community Bank Leverage Ratio Framework
15
Federal Register. Regulatory Capital Rule – Community Bank Leverage Ratio Framework