The leverage ratios of banks are calculated by dividing Tier 1 capital by consolidated assets. Tier 1 capital consists of the company’s equity, retained earnings, reserves, and other securities after subtracting goodwill. The leverage ratio has a special significance for banks since banks are highly leveraged entities. The net worth(Asset - liabilities) of a bank is measured by its capital. The bank capital is split between two major categories:Tier 1 (Retained earnings + shareholder’s equity + reserves) - This is the core capital of a bank and contains items that you would generally see on a bank’s balance sheet. Tier 2 (subordinated debt + revaluation reserves + hybrid capital + total loan loss + provisions including deferred tax.) - This is a supplementary capital.A bank’s capital is made up of both tier 1 and tier 2 capital. The tier 1 capital is more indicative of a bank's capability to sustain pressures like bankruptcy. The tier 1 capital is used majorly in the leverage ratio formula for banks. The top 3 leverage ratios for banks are:Tier 1 leverage ratio - The formula is “tier 1 capital/total assets” and this ratio was introduced to keep a check on the amount of leverage possessed by a bank. It also reinforces the risk-based requirements by using back-stop safeguard measures.Debt-to-equity ratio - Banks usually have a very high debt-to-equity ratio as they carry large amounts of debt on their balance sheets since they invest significantly in fixed assets in the form of branch networks.Debt-to-capital ratio - The formula is “total debt/total capital (tier 1 + tier 2)”Any value above 5 is deemed as an ideal leverage ratio for banks.