Risk-Weighted Assets

What are risk-weighted assets (RWAs)?

Risk-weighted assets are a way banks and regulators assign risk to each asset on a bank’s balance sheet to determine how much capital the bank must hold. Each asset is given a risk weight (a percentage). Higher weights indicate higher risk and require more capital to back them; lower weights indicate lower risk and require less capital.

Examples:
* 0% — cash, Federal Reserve Bank stock
* Low risk — U.S. Treasury securities
* High risk (near 100%) — commercial loans, corporate debt

Basel III and RWAs

Basel III, developed by the Bank for International Settlements (BIS), standardizes how banks classify assets by risk and how much regulatory capital they must maintain against those assets. The framework was developed after the 2007–2008 financial crisis to reduce the likelihood of bank failures caused by undercapitalization.

Key points:
* Banks group assets by risk type and calculate total RWAs.
* Regulators require banks to hold minimum capital ratios based on RWAs.
* Banks may use different methods to calculate RWAs, but Basel III requires using the most conservative method (the one that results in the most capital being set aside).
* Basel III implementation milestones include phased start dates established by regulators (full timelines vary by jurisdiction).

How regulators assess asset risk

Regulators evaluate each asset class using factors relevant to that asset. For loans—typically the largest asset class—common considerations include:
* Source and purpose of the loan
* Type and quality of collateral and its market value at origination
* Borrower creditworthiness and repayment history
* Loan structure (term, covenants, amortization)
* Economic or sector-specific risk (e.g., commercial real estate vs. owner-occupied property)

Low-risk assets (cash, sovereign debt from stable governments) receive low risk weights; higher-risk or unsecured exposures receive higher weights. Banks with portfolios concentrated in higher-RWA assets must hold more capital than those with lower-RWA mixes.

Risk management teams must balance capital requirements with expected returns; diversification can reduce exposure to any single asset class and lower overall RWAs.

Why RWAs matter

RWAs translate a bank’s asset mix into a regulatory capital requirement. They provide a quantitative basis for:
* Assessing whether a bank has sufficient capital to absorb losses
* Comparing capitalization across institutions with different asset profiles
* Reducing systemic risk by encouraging conservative capital buffers against riskier exposures

Key takeaways

• RWAs are used to weight assets by risk so banks hold appropriate capital.
• Basel III sets international standards for calculating RWAs and capital requirements.
• More high-risk assets mean higher RWAs and higher required capital.
• Proper risk assessment, diversification, and conservative capital planning help protect banks and the broader financial system.