The leverage ratio of a bank is calculated by dividing its Tier 1 capital by its average total consolidated assets. Basel III introduced a minimum leverage ratio of at least 3%, and in July the U.S. Federal Reserve announced that the minimum Basel III leverage ratio would be 6% for 8 Systemically Important Financial Institution banks and 5% for their bank holding companies. The phase-in period begins will begin January 2014.
As a result of the global financial crisis of 2008, many traditional investment banks and finance corporations converted themselves to bank holding companies in efforts to gain access to liquidity and funding.
Currently though, only one bank holding company, Bank of America Corp (NYSE:BAC), has the 5% minimum leverage ratio, and barely so. The U.S. banks are not as leveraged as elsewhere, but still hold risk well in excess of the safety requirement.
Morgan Stanley (NYSE:MS) points out that only a handful of big banks have cleared even the 4.2% Swiss requirement.
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