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Risk-Weighted Asset (RWA)

Risk-weighted assets (RWA) refer to a bank's assets or off-balance-sheet exposures, each assigned a weight based on its risk profile as defined by regulatory guidelines. Different types of assets, such as loans or securities, carry different levels of risk. For instance, government bonds may have a lower risk weighting compared to corporate loans. Banks are required to hold a certain level of capital in proportion to their risk-weighted assets to meet regulatory standards and maintain financial stability.

Example

A bank with $100 million in loans, of which $50 million are high-risk corporate loans, must hold more capital against those higher-risk assets than it would for lower-risk assets like government bonds.

Key points

• Assets weighted by their risk level, as determined by regulatory guidelines.

• Banks must hold sufficient capital relative to their risk-weighted assets to ensure financial stability.

• Used in regulatory capital requirements, such as Basel III, to assess a bank's risk exposure.

Quick Answers to Curious Questions

They determine how much capital a bank must hold to cover potential losses, ensuring financial stability and regulatory compliance.

Assets are assigned risk weights based on their perceived riskiness, with government bonds having lower weights and corporate loans having higher weights.

To ensure that banks hold enough capital to absorb losses from risky assets, protecting the banking system from excessive risk exposure.