BIS: leverage ratio and output floor are not substitutes for bank capital
Victoria Shinder2 min readThe Bank for International Settlements' Financial Stability Institute published a paper on 28 September asking whether two Basel III backstops, the leverage ratio and the output floor, do the same job. Its answer is no, which matters at a time when several jurisdictions are debating whether banks need both.
Both backstops bite when banks' risk weights look too low. The leverage ratio caps total exposure against capital regardless of risk; the output floor stops risk-weighted assets calculated with banks' own models from falling below 72.5% of what the standardised approaches would give once fully phased in. The paper maps all three requirements, including the ordinary risk-based ones, onto one metric, risk-weighted asset density, to show when each one sets a bank's capital.
The data cover 29 global systemically important banks from 2014 to 2025. The share of banks for which the leverage ratio is the highest requirement increased materially as their unfloored risk-weight densities declined. But the binding constraint is not stable: banks switched between the leverage ratio and risk-based requirements 55 times over the period, on annual data. Of the 13 G-SIBs that disclose output floor data, in Canada, the European Union, Japan and Switzerland, none was bound by the floor at the end of 2025 because of transitional arrangements. Under a fully phased-in 72.5% floor, six would be, including cases where the leverage ratio would not reproduce the floor's effect even partly.
The authors conclude that each backstop addresses a failure the other cannot: the leverage ratio constrains excessive leverage that risk measures might miss, while the output floor limits variability in risk weights that comes from internal models.
Why it matters
The paper lands in a debate over simplifying capital rules, where one argument is that a bank bound by the leverage ratio does not also need the output floor. The BIS evidence says the two catch different problems, and that removing one would change required capital at some of the largest banks.