A measure of a bank’s or financial institution’s capital that relates its main risk exposures to the applicable risk weights for various categories of risk, stated as a percentage. Risk weights adjust the exposures to reflect a bank’s view of its relative degree of risk. This means, the greater the risk, the higher the applicable risk weight, and consequently, the higher the amount of resulting risk-weighted assets (RWAs). This capital measure reflects a bank’s assets adjusted for their respective sets of risk. Risk weightings are set in accordance with the Basel Capital Accord as implemented by a regulatory authority.
RWAs establish a connection between the minimum amount of capital that banks are required to maintain with the risk profile of the bank’s core business (i.e., lending activities and other risky assets). The higher the risk a bank takes, the more capital is required as a buffer for depositors.
The capital impact of RWA is calculated by multiplying a bank’s risk-weighted assets by the minimum total risk-based capital ratio.
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