Risk Weighted Assets Under Basel 1

Overview




Risk Weighted Assets Formulas


Risk weights are divided into four categories.

  • 0% Weight -
  • 25% Weight -
  • 50% Weight -
  • 75% Weight -
  • 100% Weight -
An exact listing of the appropriate weights can be found at wikipedia.

Regulatory Arbitrage


The risk weight framework is a rather blunt tool. It tends to lump a group of assets of varying risk together to a single risk number. For example, all mortgages are assigned the same weight, despite the fact that some mortgages are riskier than others. This means that a bank wishing to increase return on equity without having the increase capital can do so by investing in the highest risk assets of each category.

Implementation in Code


Implementation of a risk weight calculation is fairly easy, as it is just a weighted sum. The hardest part is determining what type of asset each record of the underlying asset dataset represents.

Typically an asset record will have a column or set of columns from which to determine the asset type. This may mean that the code that determines which category an asset belongs to may involve some code that does a lookup or other computation on the set of columns that determine the asset type.

The following code makes the simplifying assumption that the risk weight category is attached to the asset record as a column named type, and utilizes the Javascript/davinci framework for transforming datasets. 


let data = [{value:100, type:'treasury'}, {value:100, type:'mortgage'}];

let answer = $list(data).map(p=>{
  if(p.type === 'treasury') return 0;
  if(p.type === 'mortgage') return p.value*0.5;
}).sum();
Try it!


Contents