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I am not really sure I understand the meaning of Risk weight defined as

RW = RWA/EAD,

where

EAD = Exposure at Default

RWA = Risk-Weighted assets

From a bank's perspective: If I have two portfolios, over two time periods, of customers and each customer is given an EAD and RWA. Does it make sense comparing the mean RW of each portfolio? (For example by computing the RW for each customer, sum them and divide by number of customers)

Why not for example just look at the total RWA?

I know that each customer, depending on credit rating, is assigned a risk weight which is a percentage.

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  • $\begingroup$ The RWA/EAD is just a measure of relative riskiness or index of risk. This index itself is an arbitrary thing - the main object is of course capital that the RWA can be translated into using the capital requirements that change over time; but at a given point, higher RWA/EAD mean higher capital requirements per unit exposure. You will also look at the overall RWA, you will frequently encounter this in the financial statements or pillar 3 reports of the bank, usually segmented by business/portfolio, and they will talk at length about what is contributing to higher RWA. $\endgroup$ – Magic is in the chain Jun 24 '20 at 20:51
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In my experience, the RWA is an output, and the risk-weight & EAD are inputs. So you first compute the EAD for each customer's portfolio. There are different ways to compute the RWAs. As you point out, one simple way is just to apply a risk-weight, depending on the customer's credit rating.

So in conclusion: you'd normally care about the customers RWAs, not the risk-weight.

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  • $\begingroup$ Thanks. I would feel that average RW over a portfolio of customers would give you an indication in where most customers are rated/a general risk profile of the portfolio. $\endgroup$ – maj3r Jun 24 '20 at 19:09
  • $\begingroup$ You have the individual customers' credit rating, so can compute the average credit rating per customer too. Yes, if (for some reason) you'd be interested in the average RW across customers' portfolio, you could do what you propose. $\endgroup$ – Jan Stuller Jun 24 '20 at 19:37

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