Riskweighted

Riskweighted refers to a concept used in finance and banking to measure the capital requirements for a financial institution based on the riskiness of its assets. This approach ensures that banks hold sufficient capital to absorb potential losses arising from their investments.

The core idea behind riskweighting is that not all assets carry the same level of risk. For example, a loan to a government with a strong credit rating is generally considered less risky than a loan to a speculative company or an investment in a volatile market. Therefore, regulatory bodies assign different risk weights to various types of assets.

Assets are multiplied by their assigned risk weight to determine their risk-weighted asset (RWA) value. For instance, a government bond might have a 0% risk weight, meaning it contributes nothing to the RWA. Conversely, a highly speculative asset might have a 100% or even higher risk weight, significantly increasing the RWA.

The total RWA of a bank is then used to calculate its capital adequacy ratios. These ratios, such as the Common Equity Tier 1 (CET1) ratio, compare the bank's capital to its RWAs. A higher CET1 ratio, for example, indicates a stronger capital position relative to the risks the bank is undertaking. Regulators set minimum capital adequacy ratios to ensure the stability of the financial system.

The Basel Accords are a set of international banking regulations that have significantly influenced the development and implementation of riskweighting methodologies. These accords provide frameworks for calculating RWAs and setting capital requirements, aiming to promote global financial stability and prevent systemic crises.