How is RWA Calculated?

By BYJU'S Exam Prep

Updated on: November 9th, 2023

RWA is calculated by multiplying the exposure value by the appropriate risk weight for the type of loan or asset. RWA is called a risk-weighted asset. Banks find the total credit risk-weighted assets by repeating the above calculation for all their assets and loans. This asset calculation is done to determine the capital adequacy ratio called CAR.

Calculation of Risk Weighted Assets (RWA)

Risk-weighted assets are designed to respond to changes in the quality and composition of the bank’s loan portfolio. When the credit risk increases, the risk-weighted assets are expected to increase to an extent.

  • Risk-weighted assets are calculated using the standardized and internal rating approach. Larger banks have the required skills and infrastructure to implement the IRB strategy. The risk weight is multiplied by the exposure volume in both systems.
  • To protect consumers and depositors from bank insolvency, APRA mandates banks and other financial institutions to maintain a certain level of capital. The APRA establishes the minimum capital adequacy indicator to determine the required amount of capital.
  • The Basel III Accord is a 2009 international regulatory agreement that included measures to strengthen international banking supervision, regulation, and risk management. Base III mandates banks to maintain suitable leverage ratios and reserve capital levels.


How is RWA calculated?

RWA is a Risk-weighted asset calculated by multiplying the exposure amount by the relevant risk weight for the type of asset or loan. It helps determine the minimum amount held by banks and private institutions to reduce the risk of insolvency.

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