what is rwa

Risk-weighted asset (RWA) is a banking term that refers to an asset classification system used to determine the minimum amount of capital that a bank or other financial institution must hold to cover an unexpected loss arising out of the risks taken by the bank. The RWA calculation is used in determining the capital requirement or Capital Adequacy Ratio (CAR) for a financial institution. The CAR is calculated as eligible capital divided by risk-weighted assets. Examples of risk-weighted assets include government bonds and debentures, and banks have different assets that are classified by their risk weight, where lower-risk assets are assigned a lower risk weight. The more risk a bank is taking, the more capital is needed to protect depositors. A bank or financial institution with a higher CAR indicates that it has sufficient capital to meet unexpected losses.