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What are risk-weighted assets?

Risk-weighted asset

Risk-weighted assets (RWAs) are a way of measuring a bank’s assets according to their different levels of risk. Safe mortgages, speculative loans and holdings in complex derivatives will all carry a different risk weighting. Every holding in the bank’s portfolio is measured, and the resulting blended figure is its risk-weighted assets.

Where have you heard about risk-weighted assets?

The use of risk-weighted assets as a measure of a bank’s overall capital at risk has grown significantly since the financial crisis of 2008. Under the Basel III capital accord regulations, banks must have top quality capital equivalent to at least 7 per cent of their risk-weighted assets.

What you need to know about risk-weighted assets.

The risk-weighted assets metric replaced more simple measures of assets to equity. Before, two banks could have held the same dollar number of assets and therefore had the same capital requirements, but one bank could have held a far riskier portfolio than the other. After 2008, regulators realised this was a serious issue and introduced the varying risk of assets in a portfolio into the capital requirement calculations. If you’re invested in banking stocks, you should be aware of exactly what assets they hold and how risky they are. The Federal Deposit Insurance Corporation (FDIC) regularly publishes that information.

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