RWA: how a bank turns its asset portfolio into a capital requirement

Risk-weighted assets (RWA) are the sum of a bank's on-balance-sheet and off-balance-sheet exposures, with each position multiplied by a weight that reflects how risky it is. This sum is the denominator of the capital adequacy ratios: capital is divided not by total assets but by RWA. For a bank as an issuer, then, what matters is not the size of its assets but their weighted version. It is this figure that determines how much capital the bank must hold, how much is left to grow the loan book and how much can be paid out to shareholders.

Why the regulator cannot use the balance-sheet total

For assets in the accounting sense, cash in a correspondent account and an unsecured consumer loan are equivalent balance-sheet lines that differ only in amount. For a bank's solvency they are not remotely comparable: the probability of loss and the size of the loss in a default are different for each. If capital were required in proportion to total assets, a bank would have an incentive to pack its balance sheet with the riskiest exposures, which earn the highest margin per unit of regulatory requirement. Risk weighting closes this loophole: it makes the regulatory cost of an asset a function of its risk rather than its volume.

The mechanics are simple. Each exposure is assigned a risk weight according to the class of counterparty, the type of collateral, the maturity and the quality of debt servicing. Claims on the sovereign in local currency receive the lightest weighting, to the point where they may generate no capital requirement at all; this helps explain banks' steady appetite for OFZ. Unsecured corporate lending, stakes in unlisted companies, overdue debt and intangible assets sit at the opposite end of the scale, and some positions are deducted from capital outright, bypassing the denominator altogether.

What goes into the denominator

RWA is not just credit risk, although credit risk dominates at a universal bank. The denominator also includes market risk on the trading book (interest rate, equity, currency and commodity risk) and operational risk, which is calculated not from specific positions but from the scale of the business and its history of losses incurred. Off-balance-sheet commitments, such as guarantees issued, letters of credit and undrawn credit lines, are first converted into a credit equivalent using a credit conversion factor and only then weighted. As a result, a bank with a moderate balance sheet and a large guarantee book may carry a far heavier denominator than its financial statements suggest at first glance.

The standardised approach and internal ratings

Weights can be taken from the regulatory table (the standardised approach) or calculated in-house by modelling the probability of default and the loss given default (the internal ratings-based approach). Internal models usually produce a lower denominator; that is their economic rationale and the reason banks invest in having them validated. The downside is that comparability across banks suffers. Two banks with similar portfolios using different approaches will report different capital adequacy without differing in actual risk. The Basel standards respond with a floor: the output of internal models cannot fall below a set share of the standardised calculation.

Risk density and dividend capacity

The working analytical indicator is the ratio of RWA to total assets, known as risk density. A rise with an unchanged balance sheet signals a shift in the portfolio towards riskier segments or a deterioration in the quality of loans already on the books; a fall signals a move into government debt and secured lending. From there, corporate finance logic takes over: growth in risk-weighted assets requires capital, capital is replenished from retained earnings, and retained earnings therefore compete with payouts. A bank that grows faster than it turns profit into capital will sooner or later run up against the buffers on top of the ratios, at which point a dividend cut is no longer a management decision but a matter of arithmetic. That is why plans for loan book growth are worth reading alongside the dividend calendar, not in isolation from it.

The Russian framework

The Bank of Russia sets out the procedure for calculating risk-weighted assets and the set of capital adequacy ratios, covering common equity, core capital and total capital, in its instruction on mandatory ratios; on top of these come the capital conservation buffer and the systemic importance buffer. A separate tool is the macroprudential add-on to risk weights: the regulator selectively raises weights in segments it considers overheated (unsecured consumer lending, mortgages with a low down payment, loans to heavily indebted borrowers). For an issuer, this means the denominator can grow without a single new loan being issued; a decision by the regulator is enough. Such decisions appear in the news flow before they show up in the financial statements.

What to look for in the reports

The platform does not yet publish RWA as a separate metric code, so no calculated value can be inserted here; it is more honest to say so plainly than to offer an attractive number out of nowhere. Banks disclose their risk-weighted assets, the breakdown by type of risk and the approach used themselves, in issuer reports and in their mandatory disclosures on risk and capital. A bank's market valuation can be set against this picture through SBER and its multiples, for example 3,92, bearing in mind that for a bank price-to-book is more informative than price-to-earnings, since capital is precisely what constrains growth. The sector as a whole is easy to scan in the list of stocks.

It is also worth keeping the mirror image in mind: RWA describes risk from the regulator's point of view, not the investor's. Your own risk tolerance is measured differently; there is a separate explainer on it in the glossary.