Risk-Weighted Assets (RWAs)

What are Risk-Weighted Assets

When banks lend money or invest, they take on risk. Some loans are safer than others—for example, a loan to an established business is usually less risky than a loan to a startup. To make sure banks are prepared for potential losses, regulators use a system called risk-weighted assets (RWAs).

RWAs help measure how risky a bank’s assets are. Instead of treating all loans and investments the same, RWAs assign different “weights” based on how likely the bank is to lose money on them. The riskier the asset, the higher the weight.

Why RWAs matter

RWAs are important because they help determine how much capital a bank needs to hold. Capital is the bank’s own money that acts as a cushion against losses. The more risk a bank takes on, the more capital it needs to keep.

This system helps protect depositors and the financial system. It ensures that banks don’t take on too much risk without having enough of their own money to cover potential losses.

How it works

Let’s say a bank has two loans:

• A $1 million loan to a large established business (very low risk)
• A $1 million loan to a small business (higher risk)

Under the risk-weighting system:

• The large established business loan might have a 0% risk weight, meaning it doesn’t count toward RWAs.
• The small business loan might have a 100% risk weight, meaning the full $1 million counts as RWA.

So even though both loans are the same size, only the riskier one increases the bank’s RWAs.

Banks also hold other types of assets, like mortgages, corporate bonds, or trading assets. Each type is assigned a risk weight based on guidelines from regulators like the Office of the Superintendent of Financial Institutions (OSFI) in Canada, which follows international standards like Basel III.

In summary

Risk-weighted assets are a way to measure how risky a bank’s assets are. They help ensure that banks hold enough capital to stay safe and stable, even if some loans or investments go bad. By adjusting for risk, RWAs give a clearer picture of a bank’s true exposure—and help keep the financial system strong.