Definitions for "Risk-Weighted Assets"
Used in the calculation of risk-based capital ratios. The face amount of assets is discounted using predetermined risk-weighting factors in order to reflect a comparable risk per dollar among all types of assets. By adjusting notional values to balance sheet (or credit) equivalents and then applying appropriate risk-weighting factors, risks inherent in off-balance sheet instruments are recognized.
Assets calculated by applying a regulatory predetermined risk-weight factor to the face amount of each asset. The face amount of off-balance sheet instruments are converted to balance sheet (or credit) equivalents, using specified conversion factors, before the appropriate risk-weights are applied. The risk-weight factors are established by the Superintendent of Financial Institutions Canada to convert assets and off-balance sheet exposures to a comparable risk level.
Risk-weighted assets factor in the risk of loans turning irrecoverable and serve as the denominator for calculating banks' capital ratios based on Bank for International Settlements rules. Under the rules, risk weights are applied to loans according to their categories. For instance, government bonds carry a risk weight of 0%, and loans extended to corporations carry a risk weight of 100%. Housing loans carry a risk weight of 50%. Banks with international operations need to have capital that represents at least 8% of their risk-weighted assets. Therefore, banks suffering from a deteriorating financial condition need to reduce their risk-weighted assets or bolster their capital. Except for Resona Holdings Inc. (8308), Japan's major banks were able to maintain their capital ratios at around 10% last fiscal year.