Risk-Weighted Assets
Risk-weighted assets are a bank’s assets adjusted for credit risk according to regulatory risk weights to determine capital requirements.
Meaning in Practice
In practice, different asset classes are assigned specific risk weights based on their perceived credit risk. Government bonds may carry low or zero weights, while corporate loans or unsecured exposures receive higher weights. The total of these adjusted values forms the bank’s risk-weighted assets (RWA), which serve as the basis for calculating capital ratios.
Why It Matters
Risk-weighted assets determine how much regulatory capital a bank must hold relative to its risk profile. Higher RWA require more capital to maintain adequate solvency buffers. This framework aims to align capital requirements with underlying risk exposure.
Market Impact
Changes in RWA influence a bank’s capital adequacy ratios and lending capacity. An increase in risk weights can constrain credit growth if additional capital is required. Investors closely monitor RWA trends as an indicator of balance sheet risk and regulatory pressure.
Example
If a bank holds €100 million in government bonds with a 0% risk weight and €100 million in corporate loans with a 100% risk weight, only the corporate loans contribute fully to risk-weighted assets for capital calculation purposes.