An intriguing graph in the BCBS Basel III monitoring report
Leafing through the BCBS Basel III monitoring report, I noticed this graph on page 21. It shows the interaction between the Basel III Tier 1 leverage ratio (horizontal axis) and the Tier 1 risk-weighted capital ratio (vertical axis). Ratios of Group 1 banks are marked with red dots and those of Group 2 banks with blue dots. The dashed horizontal line represents a Tier 1 target capital ratio of 8.5%, whereas the dashed vertical line represents a Basel III Tier 1 leverage ratio of 3%. The diagonal line represents points where an 8.5% Tier 1 target capital ratio results in the same amount of required Tier 1 capital as a Basel III leverage ratio of 3%, i.e. T1 = 2.8333 * LR.
Why this graph?
The explanation in the report is dry, however, it is interesting to see what happens if the leverage ratio requirement would go up, say from 3% to 4%. As the graph shows, this move would affect banks to the left of the 4% level (the clear part of the graph below). A fair amount of large banks (red dots) would be affected.