Risk-weighted Assets (RWA)

Risk-weighted assets (RWA) are a measure used in banking to assess the risk of a bank's assets. Different types of assets have different levels of risk associated with them. For example, loans to reliable borrowers have lower risk, while loans to less reliable borrowers have higher risk. Each asset is assigned a “risk weight,” which determines how much capital a bank needs to hold against it. This system helps ensure banks maintain enough capital to cover potential losses, promoting financial stability and protecting depositors while ensuring that the bank can lend responsibly.