Capital

Risk-Weighted Assets

Also known as RWA, Risk Weighted Assets

Risk-weighted assets (RWA) are a bank's assets and off-balance-sheet exposures, each multiplied by a risk weight set in the capital rules. RWA is the denominator of the CET1, tier 1 and total capital ratios, so it sets how much capital a bank must hold for the risks it takes.

How risk-weighted assets are calculated

Under the US standardized approach in 12 CFR Part 217 (Part 3 for national banks, Part 324 for FDIC-supervised banks), each exposure gets a risk weight: 0% for cash, reserves and US Treasuries, 20% for exposures to US banks and most agency securities, 50% for qualifying first-lien residential mortgages, 100% for most commercial loans, 150% for past-due loans and high-volatility commercial real estate, and higher weights for some equity and securitization exposures. Off-balance-sheet items are first converted to on-balance-sheet amounts with credit conversion factors. Banks with a trading book add market risk RWA, and the largest banks also compute RWA under the advanced approaches.

1. List each on-balance-sheet exposure at its carrying amount.
2. Convert off-balance-sheet exposures, such as unused commitments and standby letters of credit, with credit conversion factors.
3. Multiply each exposure by its risk weight under the capital rule.
4. Add the weighted amounts, plus market risk RWA if the bank has a trading book. Banks report the total on Schedule RC-R, Part II.

Worked example

Why does Risk-Weighted Assets matter?

RWA turns a bank's asset mix into the base for its capital requirement. Two banks with the same total assets can need very different capital: one holding mostly Treasuries carries little RWA, one holding construction loans carries a lot. A dollar of RWA reduction lowers required capital just as a dollar of new capital raises the ratio, which is why banks manage both.

The pending Basel III endgame proposals would change how US banks calculate risk-weighted assets, most of all at banks with $100 billion or more in assets.

How do you interpret Risk-Weighted Assets?

Divide RWA by total assets to get RWA density. Community banks with loan-heavy books often run 65% to 80%; large banks with big securities, cash and trading books run lower. Low density is not the same as low risk: risk weights ignore interest rate risk, so a bank full of long-dated Treasuries can carry little RWA and large unrealized losses at the same time. Read RWA with the leverage ratio, which ignores risk weights altogether.

What RWA density says about a bank

Frequently asked