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Adjusted aggregate leverage ratio

What Is Adjusted Aggregate Leverage Ratio?

The Adjusted Aggregate Leverage Ratio is a measure designed to assess a financial institution's overall leverage by comparing its Tier 1 capital to its total unweighted exposures. This ratio, a key component of financial stability frameworks, aims to prevent excessive debt accumulation that could threaten the broader financial system. Unlike risk-weighted measures, the Adjusted Aggregate Leverage Ratio provides a simple, non-risk-based backstop, ensuring that banks maintain a fundamental level of capital regardless of the perceived riskiness of their assets. This helps to mitigate the build-up of leverage that can lead to destabilizing deleveraging processes during periods of financial stress.

History and Origin

The concept of a leverage ratio gained significant prominence following the 2008 financial crisis, which exposed shortcomings in existing regulatory capital frameworks. Prior to the crisis, many regulations focused heavily on risk-weighted assets, which could sometimes underestimate the true extent of a bank's leverage, particularly concerning complex [off-balance sheet exposures](https://divers[1](https://www.imf.org/en/Publications/WP/Issues/2022/01/28/Usability-of-Bank-Capital-Buffers-The-Role-of-Market-Expectations-511947), 23456