Risk Weighted Assets

The estimated value of assets of a bank adjusted for risk.

Background

Risk Weighted Assets (RWA) are assets of a bank that are weighted according to credit risk. This concept or measure isn’t solely limited to credit risk; it encompasses several aspects of financial risk, the most significant being default or credit risk, operational risk, and market risk.

Historical Context

Originating from the agreements of the Basel Accords, risk weighting methods were devised to help manage the amount of capital that a bank must hold to reduce its exposure to unexpected losses. The Basel Committee on Banking Supervision (BCBS) formulated this to create a resilient global banking system, improve the ability to absorb shocks arising from financial and economic stress, and protect depositors’ and the public’s financial interests.

Definitions and Concepts

RC: \[capital ratio\], RWA: \[Risk Weighted Assets\], Risk Weighted Assets involve calculating the credit risk attached to the different types of assets held by a bank, weighing them accordingly, and adjusting their value to determine how much capital is required to cover potential losses. Banks typically use tiers to categorize these risks, with Tier 1 capitol seen as being more robust and Tier 2 including supplementary capital.

Major Analytical Frameworks

Classical Economics

In Classical Economics, analyses primarily focused on real factors like productivity and savings. Abstract from dealing with banking risks, thus do not address RWAs directly.

Neoclassical Economics

Just like its predecessor, RWAs would be beyond problematic given the assumptions of perfect information and rational agents comprehensively.

Keynesian Economics

Keynesian economists might emphasize the role of financial stability in functioning economic systems but traditionally don’t venture into the micro risks wavings.

Marxian Economics

Focused mainly on capital accumulation and social hierarchy issues.

Institutional Economics

Acknowledges the critical roles institutions, like modulating systems for RWAs, make in attenuating uncertainty and ensuring financial stability.

Behavioral Economics

Would find exploring RWAs interesting as decision biases regarding mundane capital risk in the banking context.

Post-Keynesian Economics

Might explore RWA in the spirit of ensuring stable financial systems that Macroeconomics relying on market equilibrium theories somewhat touche.

Austrian Economics

Their skepticism towards regulatory interventions would provoke critical examinations of mandated bank Capital ratios sourced from RWAs.

Development Economics

Exploration of how access to stable and correctly managed banking capitals remove hindrances to socio-economic development.

Monetarism

The perspective of viewing capital requirements for banks (driven by RWAs) holistically fits keeping to traditional explanations of inflation targeting facilitated stable credit earn.

Comparative Analysis

Various regions and institutions adopt their methods refined from international standards liquidating implications; for example, European banks operate under the nuanced regulations entwined with Basel III deductions-overhead regimes.

Case Studies

Studying how Risk Weighted Asset methodologies prevented potentially detrimental systemic banking failures during financial crises can enrich ground detail examples for examinations e.g Global Financial Crisis of 2007-08 contrasting jurisdictions ( U.S vs EU profiles).

Suggested Books for Further Studies

  • “Capital Requirements for Banks: Capital Quality-One-Price Theory, Dynamics of Risk” by Peter Keller”
  • “Risk Management and Capital Adequacy” by Amal Berreirono
  • Credit Risk: Potential that a borrower will default on a loan obligation.
  • Basel Accords: International regulatory framework for banks, developed by the Basel Committee.
  • Operational Risk: Risk of loss resulting from inadequate or failed internal processes, people, systems, or external events.
  • Tier 1 Capital: Core capital of a bank’s strength defined by subset capital metricsAttribPointer management.
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Wednesday, July 31, 2024