Definition
RWA (risk-weighted assets), or the total risk exposure amount, translate an institution's exposures into an amount comparable with its own funds. A low-risk exposure receives a low weight, a risky exposure a high weight. RWA are the denominator of the CET1, Tier 1 and total capital ratios.
Calculation method
- Credit and counterparty risk: the standardised approach, with risk weights set by exposure class, rating and collateral, or the internal ratings-based (IRB) approach, using the bank's estimates of probability of default, loss given default and exposure at default.
- Credit valuation adjustment (CVA) risk on derivatives.
- Market risk: standardised approach or internal models, on the trading book and foreign exchange and commodity risk.
- Operational risk: since CRR3, a single standardised approach based on a business indicator.
For market and operational risk, the own funds requirement is converted into RWA by multiplying it by 12.5.
Regulatory requirement
The calculation is set by the CRR, as amended by CRR3, which implements the Basel III finalisation. It introduces in particular an output floor: RWA computed with internal models cannot fall below 72.5% of standardised RWA, phased in gradually. RWA are reported in COREP and reviewed in the SREP.
Practical challenges
- Quality and granularity of exposure, rating and collateral data.
- Explaining RWA changes between volume, credit quality, methodology and regulatory effects.
- Projecting RWA in the capital plan and under stress, for the ICAAP.
In RIALTO
This concept is covered by the Solvency Insight Core module. The use case 'Stress simulation' shows it in practice.