Risk-Weighted Assets

Risk-weighted assets (RWA) are a measure of a bank's capital adequacy. They are calculated by multiplying the value of each asset by an assigned risk weight. The risk weights are based on the perceived riskiness of the asset.

The higher the risk weight, the more capital the bank must hold against that asset. This is because the bank is more likely to lose money on a risky asset.

RWA are used to determine a bank's capital ratio. The capital ratio is a measure of a bank's ability to withstand losses. It is calculated by dividing a bank's capital by its risk-weighted assets.

The higher the capital ratio, the more secure the bank is. This is because the bank has more capital to absorb losses.

RWA are important because they help to ensure that banks are adequately capitalized. This protects depositors and the financial system from bank failures.

There are two main types of risk weights: credit risk weights and market risk weights.

Credit risk weights are assigned to assets based on the perceived risk of default. The higher the risk of default, the higher the risk weight.

Market risk weights are assigned to assets based on the volatility of their prices. The more volatile the price, the higher the risk weight.

RWA are calculated on a bank-by-bank basis. The Basel Committee on Banking Supervision sets the minimum capital ratios that banks must maintain.

The Basel Committee has issued several revisions to the RWA framework over the years. The most recent revision, Basel III, was issued in 2010.

Basel III introduced a number of new requirements for RWA, including:

* A higher minimum capital ratio of 8%
* A new risk weight for sovereign debt
* A new risk weight for securitized assets

RWA are an important part of the Basel III framework. They are designed to ensure that banks are adequately capitalized and that the financial system is stable.