Risk-Weighted Assets (RWA)

In a bank's capital management, banks use RWA to see how much the capital needed changes before and after transactions are added. The credit and CVA portions of derivatives also add to RWA and raise the capital needed.

RWA is the denominator of the capital adequacy ratio

Risk-weighted assets (RWA) is the amount that serves as the denominator of the capital adequacy ratio. The capital adequacy ratio is capital divided by RWA. Banks that operate internationally are required to keep it at 8% or higher, and banks that operate only in Japan at 4% or higher¹. The denominator weights assets by risk instead of using the raw amount of assets. The aim is for a bank to hold capital that matches the possible losses from a borrower's default, from market moves, and from clerical errors and fraud¹.

Take a 100 million yen loan to a company to see how the weights work. The calculation uses the minimum under the international standard (8% for the total capital ratio), which applies to banks with overseas business offices, so the minimum capital needed is 8% of RWA. Credit risk-weighted assets are calculated with the standardized approach, the method set out in Chapter 6 of the FSA's notice on capital adequacy standards (the Notice), and the risk weight is the value the Notice sets for each type of counterparty².

Even though the loan is the same 100 million yen, RWA is 20 million yen at a 20% risk weight and 150 million yen at 150%, so the minimum capital needed is 7.5 times as large. For a loan with a 100% risk weight, RWA equals the loan amount, 100 million yen, and the capital needed is 8 million yen¹. The risk weight values are those set in Article 65 of the Notice³.

How the capital adequacy ratio is found

Under the international standard, which applies to banks with overseas business offices, there are three numerators for capital. The denominator is the same RWA for all of them⁴.

The three numerators are as follows⁵. Common equity Tier 1 (CET1) capital is common stock, retained earnings, and similar items. Tier 1 capital adds Additional Tier 1 capital, such as preferred stock and perpetual subordinated bonds. Total capital adds Tier 2 capital, such as subordinated bonds with a fixed term.

Figure description

RWA is credit RWA (including the derivatives portion and the CVA portion) plus the market risk equivalent and the operational risk equivalent, each divided by 8%. The market risk equivalent is added when it is included. The three capital amounts (CET1 capital, Tier 1 capital, and total capital) are counted separately. Dividing each by RWA gives three ratios, and each is checked against its minimum: at least 4.5% for CET1, 6% for Tier 1, and 8% for total capital.

When the market risk equivalent is included, RWA is found as follows, following the formula in the Notice⁴⁶.

$$\text{RWA} = A + \frac{M}{0.08} + \frac{O}{0.08}$$

$A$ is the total credit risk-weighted assets, $M$ is the total market risk equivalent, and $O$ is the total operational risk equivalent. 0.08 is 8%. Dividing $M$ and $O$ by 8% puts them in the same unit as $A$, an amount of assets. Each of the three ratios is found by dividing the corresponding numerator by RWA.

$$\text{Capital adequacy ratio} = \frac{\text{Amount of capital}}{\text{RWA}}$$

The minimums are a CET1 ratio of 4.5% or higher, a Tier 1 ratio of 6% or higher, and a total capital ratio of 8% or higher⁴. In addition, a capital conservation buffer of 2.5% is required, and the buffer is measured in CET1 capital⁷. In the chart of the FSA's overview, the level obtained by adding the 2.5% buffer to the 8% minimum total capital ratio is 10.5%⁷.

If the buffer is not met, outflows such as dividends and share buybacks are restricted⁸. There is also a countercyclical buffer (set at 0% in Japan)⁸.

How risk weights are set

For rated exposures to corporations, such as companies, the Notice maps the rating to a credit risk category (4-1 to 4-5). The risk weights are 20%, 50%, 75%, 100%, and 150% by category. Without a rating the weight is 100%, and it can be 85% for small and medium-sized enterprises (SMEs), etc. with annual sales under 5 billion yen³. Some items, such as cash, have a 0% weight⁹.

As the category moves from 4-1 to 4-5, the risk weight rises, and for the same amount of exposure, RWA and the capital needed increase. The 100% for no rating is the same value as for 4-4. This table applies to exposures to corporations. The portion to which a bank applies the approach that uses its own internal ratings is treated differently¹⁰. The examples below use only the table for corporations.

RWA for derivatives and CVA

For derivatives, counterparty credit risk, the risk of a loss if the counterparty defaults, is included in credit RWA. For banks that use the standardized approach, credit RWA is found by multiplying the credit equivalent amount of the derivatives (the amount that corresponds to exposure at default) by the counterparty's risk weight¹¹. The credit equivalent amount is calculated with SA-CCR or the expected exposure method¹².

The other part is the CVA portion, which covers changes in fair value caused by changes in the counterparty's creditworthiness. The Notice provides that the CVA risk equivalent divided by 8% is added to credit RWA¹¹. For a derivative transaction subject to CVA, the same transaction produces two RWA amounts: one for counterparty default and one for CVA. Transactions with qualifying central counterparties, among others, are not subject to CVA¹³. How this regulation affects credit management is covered in Overview of the Regulatory Treatment of Counterparty Risk.

RWA for market and operational risk

The denominator under the international standard also includes the portion for market risk. However, a bank that meets the conditions for its category may leave out the market risk equivalent⁶. The market risk that the Notice measures mainly covers the risk of movements in interest rates, equity prices, and similar variables in the trading book¹⁴.

Operational risk is the risk of loss from clerical accidents, misconduct, and similar events¹. The Notice provides that the operational risk equivalent is calculated with the standardized measurement approach¹⁵. This portion is calculated for the bank's business as a whole, not only for derivatives.

Where they are included, each equivalent is divided by 8% and added to RWA.

Worked example: total RWA and how the ratios move

Consider a hypothetical example in which a bank calculates its RWA and capital adequacy ratios under the international standard. The bank has two derivative counterparties. Company X has a credit risk category of 4-2 (risk weight 50%), and Company Y has no rating and is not an SME, etc. (100%). Amounts are in million yen.

For capital, assume CET1 capital of 1,600 million yen, Additional Tier 1 capital of 200 million yen, and Tier 2 capital of 600 million yen. Tier 1 capital is 1,800 million yen, and total capital is 2,400 million yen. Dividing each by the RWA of 20,000 million yen gives a CET1 ratio of 8.0%, a Tier 1 ratio of 9.0%, and a total capital ratio of 12.0%. All three are above the minimums. The CET1 ratio is 3.5 percentage points above the 4.5% minimum, which serves as a rough indicator that the 2.5% buffer is met⁷.

Next, keep capital unchanged and change only the market risk equivalent.

When the equivalent doubles, RWA rises by 7,500 million yen to 27,500 million yen. All three ratios fall. They still meet the minimums (4.5%, 6%, and 8%), but the CET1 ratio is only 1.3 percentage points above its minimum, which does not reach the 2.5% buffer⁷.

When the equivalent is halved, RWA falls by 3,750 million yen to 16,250 million yen, and all three ratios rise even though capital is the same. Ratios are rounded to one decimal place.

When RWA rises, the capital needed rises too

If RWA doubles, the minimum capital needed also doubles. A 100 million yen loan with a 100% risk weight requires 8 million yen of capital, whereas at 200% it requires 16 million yen¹. In the example above, the minimum capital needed (8%) for RWA of 20,000 million yen is 1,600 million yen. Of that, the part for the CVA RWA of 5,000 million yen is 400 million yen, which equals the CVA risk equivalent. XVA as a whole, including CVA, is covered in Overview of XVA.

The actual RWA calculation varies with the bank's category and the method it uses.

Notes

1. Financial Services Agency, "バーゼル規制の概要" (Overview of the Basel framework, our translation) (August 2026), page 12 (in Japanese). Example risk weights (20–150%), the minimums of 8% (international) and 4% (domestic), a 100 million yen loan at a 100% risk weight needing 8 million yen of capital (16 million yen at 200%), and the explanation of the three risks. ↩ ↩² ↩³ ↩⁴ ↩⁵

2. Financial Services Agency, "銀行法第十四条の二の規定に基づき、銀行がその保有する資産等に照らし自己資本の充実の状況が適当であるかどうかを判断するための基準" (Standards for determining whether a bank's capital adequacy is appropriate in light of the assets it holds, under Article 14-2 of the Banking Act, our translation; FSA Notice No. 19 of 2006), Article 1, item 8 (page 9 of the FSA's consolidated version) (in Japanese). The Notice calls RWA "リスク・アセットの額" and the FSA's overview calls it "リスクアセット"; both mean RWA. ↩

3. The Notice, Article 65, paragraphs 1, 3, and 4 (page 157 of the FSA's consolidated version). The credit risk categories and the table of risk weights for exposures to corporations, etc. Unrated exposures are 100%, and SMEs, etc. (annual sales under 5 billion yen) can be 85%. ↩ ↩²

4. The Notice, Article 2 (pages 26–27 of the FSA's consolidated version). The minimums of 4.5% for the consolidated common equity Tier 1 ratio, 6% for the consolidated Tier 1 ratio, and 8% for the consolidated total capital ratio, and the formula for the denominator. ↩ ↩² ↩³

5. Financial Services Agency, "バーゼル規制の概要", pages 3–4 (in Japanese). CET1 capital is common stock, retained earnings, and similar items; Additional Tier 1 capital is preferred stock, perpetual subordinated bonds, and similar items; Tier 2 capital is subordinated bonds with a fixed term and similar items. ↩

6. The Notice, Article 4 (page 30 of the FSA's consolidated version). If the conditions set for each bank category are met, the market risk equivalent portion can be removed from the formulas in Article 2 and Article 2-2, paragraph 1. For a bank that maintains a trading account (特定取引勘定), the conditions include that the total of the assets and liabilities in the trading account, among other amounts, is below a size threshold. ↩ ↩²

7. The Notice, Article 2-2, paragraphs 1 and 3 (page 28 of the FSA's consolidated version), and Article 7-2, paragraph 1 (pages 41–42). The capital conservation buffer ratio is 2.5%, measured in CET1. The chart on page 3 of the FSA's "バーゼル規制の概要" shows 10.5%. ↩ ↩² ↩³ ↩⁴

8. Financial Services Agency, "バーゼル規制の概要", page 3 (dividends and similar payments are restricted when the capital buffer is not met) and page 5 (in Japanese). The countercyclical buffer is set at each country's discretion, and at the time of this document (August 2026) the level in Japan is 0%. ↩ ↩²

9. The Notice, Article 55 (pages 139–140 of the FSA's consolidated version). The risk weight for cash is 0%. ↩

10. The Notice, Article 146, paragraph 1 (page 260 of the FSA's consolidated version) and Article 148 (page 261). A bank that has adopted the internal ratings-based approach applies the standardized approach to some business units or asset classes, for example where its plan so provides. ↩

11. The Notice, Article 48, paragraph 1, items 1 and 3 (page 136 of the FSA's consolidated version). For a bank that has adopted the standardized approach, the total credit risk-weighted assets is the sum of the asset amounts and credit equivalent amounts of derivative transactions, etc. multiplied by risk weights, the CVA risk equivalent divided by 8%, and so on. ↩ ↩²

12. The Notice, Article 79, paragraph 1 (page 188 of the FSA's consolidated version). The credit equivalent amount of a derivative transaction is calculated with SA-CCR or the expected exposure method. Some domestic-standard banks can use the current exposure method (paragraph 2 of the same article). ↩

13. The Notice, Article 270-2, paragraph 2 (page 394 of the FSA's consolidated version). CVA applies to derivative transactions, etc. (excluding those of low materiality) with counterparties other than qualifying central counterparties and similar entities. ↩

14. The Notice, Article 271, paragraph 1 (page 433 of the FSA's consolidated version). ↩

15. The Notice, Article 303, paragraph 1 (page 559 of the FSA's consolidated version). ↩