Leverage ratio framework under Basel-III is calibrated to act as a credible supplementary measure to risk based capital requirements. Elaborate its objective in context of report of the committee on Basel-III.

Leverage ratio: One of the underlying features of the crisis was the build-up of excessive on and off-balance sheet leverage in the banking system. In many cases, banks built up excessive leverage while still showing strong risk based capital ratios. During the most severe part of the crisis, the banking sector was forced by the market to reduce its leverage in a manner that amplified downward pressure on asset prices, further exacerbating the positive feedback loop between losses, decline in bank capital, and contraction in credit availability. Therefore, under Basel III, a simple, transparent, non-risk based leverage ratio has been introduced. The leverage ratio is calibrated to act as a credible supplementary measure to the risk based capital requirements. The main objectives of leverage ratio frame work are: The leverage Ratio in Basel III is introduced to reduce the risk of deleveraging in the future and also the damage which can be inflicted on the broader financial system and the economy. To constrain the build-up of leverage in the banking sector, helping avoid destabilizing deleveraging processes which can damage the broader financial system and the economy. It is also directed towards reinforcement of the risk based requirement with a simple, non-risk based backstop measure.