Risk-Weighted Assets [RWA]

Risk-Weighted Assets (RWA) represent a bank’s assets weighted by credit risk, market risk, and operational risk, serving as the denominator in regulatory capital ratios. Different asset categories carry standardized risk weights: cash and government securities (0%), residential mortgages (35-50%), corporate loans (20-150% depending on rating), and past-due loans (150%). For example, $100 million in Treasury bonds contributes $0 to RWA, while $100 million in corporate loans contributes $100 million. Advanced banks use internal models to calculate risk weights based on probability of default, loss given default, and exposure at default. Basel III introduced stricter RWA calculations, including credit valuation adjustment for derivatives and higher weights for financial institution exposures. A bank with $1 trillion in total assets might have $600 billion in RWA after applying risk weights. Minimum capital requirements apply to RWA, not total assets. Banks optimize RWA through portfolio management, credit risk mitigation (collateral, guarantees), and balance sheet structure. Critics argue risk weights can be gamed and may not reflect true economic risks.