what are risk weighted assets 
risk weighted assets are used to determine the minimum amount of capital a bank must hold in relation to the risk profile of its lending activities and other assets this is done in order to reduce the risk of insolvency and protect depositors the more risk a bank has the more capital it needs on hand the capital requirement is based on a risk assessment for each type of bank asset for example a loan that is secured by a letter of credit is considered to be riskier than a mortgage loan that is secured with collateral and thus requires more capital investopedia sydney saporitounderstanding risk weighted assetsthe financial crisis of 2007 and 2008 was driven by financial institutions investing in subprime home mortgage loans that had a far higher risk of default than bank managers and regulators believed to be possible when consumers started to default on their mortgages many financial institutions lost large amounts of capital and some became insolvent 1basel iii a set of international banking regulations set forth certain guidelines to avoid this problem moving forward regulators now insist that each bank must group its assets together by risk category so that the amount of required capital is matched with the risk level of each asset type basel iii uses credit ratings of certain assets to establish their risk coefficients the goal is to prevent banks from losing large amounts of capital when a particular asset class declines sharply in value 2there are many ways risk weighted assets are used to calculate the solvency ratio of banks bankers have to balance the potential rate of return on an asset category with the amount of capital they must maintain for the asset class 