Risk-weighted assets (RWA): Risk-weighted assets are a bank’s assets restated by how risky each one is, so a capital requirement scales with the risk taken rather than with the size of the balance sheet.
How it is calculated
Reported on Schedule RC-R. Each exposure carries a weight set by rule: 0% for cash and Treasury securities, 20% for most agency paper and interbank claims, 50% for qualifying residential mortgages, 100% for ordinary commercial loans, and 150% for high volatility commercial real estate and certain past due exposures.
Formula
RWA = sum of each exposure multiplied by its regulatory risk weight
How to read it
RWA is the denominator of every risk based capital ratio. Two banks the same size can carry very different RWA, and a bank can improve a risk based ratio without raising a dollar by moving into lower weighted assets. That is precisely why the leverage ratio exists as a floor beneath them.
The common mistake. Expecting every bank to report it. Banks that elected the community bank leverage ratio, roughly 44% of the industry, do not compute risk weighted assets at all.
Go deeper
- What is a good tier 1 leverage ratio?
- BankingLens pricing and what a subscription adds: percentile rank against the bank’s own FFIEC peer group, fourteen quarters of trend, and the flags an examiner reaches for first.
See also. Tier 1 capital, Tier 1 leverage ratio, Community bank leverage ratio, CRE concentration.
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