What are assets weighted by the risk?

Risk weighted assets are those holding a bank or other financial properties that are weighed according to their risk level. This system of asset risk determines the Federal Reserve in the United States to determine how much capital the bank must have at hand at any time to avoid financial failure. The Bank must contain capital that measures a predetermined percentage of its risky weighted assets. Each asset is assigned a risk weight that is based on the above risk. It is possible that the bank that has, is well -supplied with cash, is financially healthier than one strongly dependent on loans and loans. This system helps to prevent the bank to risk more risks than it is able to cover if some of its less stable businesses fail.

In a system weighted by a risk, certain assets are assigned a risk weight that is multiplied by the actual value of the asset at hand. Credit letters or bonds and common loans have a risk of 1.0 while HYPotal loans are 0.5 and loans between banks are 0.2. Cash and government securities have no risk because there is no risk to these assets.

For example, a bank and has $ 2,000 accreditation in the US (USD), common outstanding loans of $ 500, $ 600 mortgage loans, and $ 1,000 interbank loans. Using risk weights in accordance with these values ​​of $ 2,000, they multiply $ 1.0 to obtain $ 2,000. $ 500 is also multiplied by $ 1.0 to receive $ 500, multiplied by 0.5 to receive $ 300, and $ 1,000 is multiplied by 0.2 to obtain $ 200. The addition of all these sums together gives the bank a total of $ 3,000 to risk -weighted assets.

Using it, the total number determines the amount of capital that the bank must have at hand to cover this risk. According to the US Federal Reserve Council, the level 1 capital, which is the value of the bank's shares added to nAdd up to 4 percent of risky weighted assets to erosion earnings. Total capital, which includes subordinate debt, loan reserves and level 1 capital must add up to 8 percent of these assets. In the above example, the bank and the capital of level 1 equal to $ 120 and total capital of $ 240 to compensate for their risks would have to have a level 1 equal to the level 1.