The idea of Risk Weighted Assets is to determine the Capital needs of a bank based on the level of riskiness of the assets that the bank possesses . If a bank holds riskier assets than Capital requirement will also be higher and vice versa. It is calculated simply by multiplying the asset with a factor representing the risk (the risk factor). Riskier assets are multiplied by a higher value while assets posing a lower risk are multiplied by a lower factor. Ordinary loans, debentures and letter of credit has the highest risk weight of 1.0. Mortgage loans are relatively less risky with a risk weight of 0.5 whereas interbank loans weigh 0.2 only, cash and government securities are the most secured and hence have 0 risk weight attached to them.
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