Risk-weighted assets: Difference between revisions
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[[Risk-weighted assets]] are used to determine the minimum amount of [[Regulatory capital|capital]] that banks and other financial institutions must hold to guard against their risk of insolvency. It is based on a risk assessment for each type of asset. For example, a [[loan]] that is secured by a [[letter of credit]] is considered to be riskier and requires more capital than a [[loan]] that is secured with a [[mortgage]]. | |||
The [[global financial crisis]] was something of a come-to-Jehosophat moment for the Basel boxwallahs, as it turned out not to be a very good measure of risk, being somewhat counter-cyclical. So they in [[Basel III]] they introduced the [[leverage ratio]] to capture risks that they decided the [[RWA]] measure wasn’t capturing. | |||
{{sa}} | {{sa}} | ||
*[[Leverage ratio]] | *[[Leverage ratio]] | ||
*[[Global financial crisis]] | |||
Revision as of 14:14, 14 June 2019
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Regulatory Capital Anatomy™
The JC’s untutored thoughts on how bank capital works.
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Risk-weighted assets are used to determine the minimum amount of capital that banks and other financial institutions must hold to guard against their risk of insolvency. It is based on a risk assessment for each type of asset. For example, a loan that is secured by a letter of credit is considered to be riskier and requires more capital than a loan that is secured with a mortgage.
The global financial crisis was something of a come-to-Jehosophat moment for the Basel boxwallahs, as it turned out not to be a very good measure of risk, being somewhat counter-cyclical. So they in Basel III they introduced the leverage ratio to capture risks that they decided the RWA measure wasn’t capturing.