Risk Weighted Assets
What are risk-weighted assets?
Risk-weighted assets refer to the fact that banks are required to carry a certain amount of capital to protect against unexpected losses. The amount of capital required changes, or is ‘weighted,’ depending on the level of asset risk. Some assets, such as gold coins, may be assigned zero risk weight while other assets, such as a loan a bank issued that is secured only with a promissory note, would be assigned a risk weight.
This system is more flexible than requiring a standard percentage of capital to be held regardless of the asset.