how to assess asset risk
regulators consider several tools to assess the risk of a particular asset category since a large percentage of bank assets are loans regulators consider both the source of loan repayment and the underlying value of the collateral a loan for a commercial building for example generates interest and principal payments based on lease income from tenants if the building is not fully leased the property may not generate sufficient income to repay the loan since the building serves as collateral for the loan bank regulators also consider the market value of the building itself a u s treasury bond on the other hand is secured by the ability of the federal government to generate taxes these securities carry a higher credit rating and holding these assets requires the bank to carry far less capital than a commercial loan under basel iii u s government debt and securities are given a risk weight of 0 while residential mortgages not guaranteed by the u s government are weighted anywhere from 35 to 200 depending on a risk assessment sliding scale 3special considerationsbank managers are also responsible for using assets to generate a reasonable rate of return in some cases assets that carry more risk can also generate a higher return for the bank because those assets generate a higher level of interest income to the lender if the management creates a diverse portfolio of assets the institution can generate a reasonable return on the assets and also meet the regulator s capital requirements 