Definition of risk-weighted assets
Risk-weighted assets measure credit risk in a bank's banking book - ie loans etc (both on and off the balance sheet). A credit risk is a risk that the bank will not be able to recover the money it is owed. Risk weighting are assigned to all the bank's assets with weightings ranging from 0% for things like cash to 100% for risky assets such as loans to private sector companies. Under the new Basel II regulations, banks have the option of applying one of two approaches. They can either adopt a standardised approach with risk weights according to the type of asset AND the credit rating of the counterparty (eg a loan to a AAA corporate would be 20% risky under Basel II but would have been 100% risky under Basel I), or they can use an internal ratings based approach with risk weights calculated internally on the basis of statistical parameters. This approach is only available to banks with adequate risk management systems (approved by the FSA).
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