Risk-weighted assets

The Jolly Contrarian’s Glossary The snippy guide to financial services lingo.™ From our machine overlords Here is what, NiGEL, our cheeky little GPT3 chatbot had to say when asked to explain: Risk-weighted assets — it’s a plural noun, in that there’s not much sense talking about one — are used to determine the “capital adequacy ratio” (“CAR”) minimum capital a bank must hold given the assessed risk of its lending activities and other assets. This is meant to reduce the risk of insolvency and protect depositors and, er, shareholders, but really, unless you are Swiss and your shareholders are from Saudi Arabia, no-one cares less about bank shareholders, which is one of the enduring mysteries of the financial markets. Why anyone would be a bank shareholder. Excuse me if I seem a bit bitter: I have just broken off a long and disappointing relationship with Credit Suisse. view template Disclaimer: NiGEL’s a neural network, he drinks a lot, and he spends too much time on the internet, so if you listen to anything he has to say you only have yourself to blame. Come to think of it, that is also true of the JC in general. Index — Click the ᐅ to expand: Glossary Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here. Premium version of this page

Risk-weighted assets
/rɪsk ˈweɪtɪd ˈæsɛts / (n.)

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 the bank holds on its balance sheet.

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.

See also

• Leverage ratio
• Global financial crisis