Weighted Average Rating Factor (WARF)

The weighted average rating factor (WARF) is a measure of the credit quality of a portfolio of assets. It is calculated by multiplying the credit rating of each asset by its weight in the portfolio and then summing the results. The WARF is used to determine the risk of a portfolio and to set the interest rate on a loan.

The WARF is a more accurate measure of credit risk than the average rating of the assets in a portfolio because it takes into account the size of each asset. For example, a portfolio with two assets, one rated AAA and one rated BBB, would have an average rating of AA. However, the WARF would be higher because the BBB-rated asset is more than twice as large as the AAA-rated asset.

The WARF is also used to calculate the risk-based capital requirement for a bank. The risk-based capital requirement is the amount of capital that a bank must hold in reserve to cover its potential losses. The higher the WARF, the higher the risk-based capital requirement.

The WARF is a valuable tool for banks and other financial institutions to manage credit risk. It can be used to identify and mitigate risks, and to set appropriate interest rates.