Risk-weighted assets

A bank's assets with each weighted by its riskiness, so a loan to a weak borrower counts for more than cash or government bonds. The denominator of the regulatory capital ratios.

Where you will meet it

Risk-weighted assets appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Explain ratios specific to particular industries and how ratios help forecast earnings
  CFA Level I · Financial Statement Analysis

  “Retailers are judged on same-store sales growth and sales per square metre; hotels on occupancy and revenue per available room, which is occupancy times the average daily rate; airlines on load factor and revenue per available seat mile; banks on net interest margin and on capital ratios such as common equity Tier 1 capital divided by risk-weighted assets.”

• Explain the main features of how financial institutions are regulated
  CFA Level II · Financial Statement Analysis

  “Capital is measured against risk-weighted assets: common equity Tier 1 of at least 4.5%, Tier 1 of at least 6% and total capital of at least 8%, with a conservation buffer on top.”

• Explain the CAMELS approach to bank analysis, which covers capital adequacy, quality of assets, management, earnings, liquidity and sensitivity, with its main ratios and its limitations
  CFA Level II · Financial Statement Analysis

  “Capital adequacy uses CET1, Tier 1 and total capital ratios over risk-weighted assets.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

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