# 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.

Perhaps the Committee included the graph to remind policy makers that an increase of the leverage ratio requirement would prompt resistance from some (angry) red dots.

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