Risk-Weighted Assets (RWA)
Definition
Risk-weighted assets are a bank's assets and off-balance-sheet exposures weighted by regulatory risk factors, so that riskier exposures require more capital. RWA is the denominator of capital ratios like CET1: capital requirements scale with the riskiness, not just the size, of the balance sheet.
Illustrative standardized weights: 0% for US Treasuries and certain sovereign exposures, low weights for well-secured residential mortgages, and 100% (or more) for typical corporate loans — exact weights depend on the applicable Basel framework and national implementation. Banks may use standardized approaches or (with approval and subject to output floors) internal models. RWA also includes charges for market risk and operational risk, not just credit risk.
Consequence: two banks with identical total assets can have very different capital requirements depending on asset mix, and 'RWA optimization' is a real lever in bank strategy.
Why interviewers ask
RWA is the concept that makes bank capital questions make sense — interviewers ask why a Treasury portfolio 'costs' less capital than a loan book, or how a bank can grow assets without growing capital requirements. It underpins CET1 discussions and FIG M&A analysis, where acquirers model the RWA and capital impact of a target.
Related terms
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