How do you calculate risk-weighted assets?

Multiply each exposure by its risk weight and add the results. Off-balance-sheet items are first converted into an exposure using a credit conversion factor, and financial collateral that meets the rules can reduce the exposure. A US$1m loan weighted at 100% adds US$1m; one weighted at 20% adds US$0.2m. The bank then adds charges for market risk and operational risk to reach total risk-weighted assets, which is the figure its capital ratio is measured against.

Do undrawn credit lines count towards risk-weighted assets?

Yes, in part. The undrawn amount is multiplied by a credit conversion factor before the risk weight applies. In the Basel framework the factor is 40% for a commitment and 10% for one the bank can cancel at any time without notice, which is why, on that table, a demand overdraft uses far less capital than a committed revolver of the same size. Regulators apply their own versions of these factors, and a facility's cancellation terms decide which one it receives.

Total risk-weighted assets divided by total assets. It shows how much of a bank's balance sheet counts for capital purposes, and is a shorthand for the riskiness of its mix. A book heavy in housing or government bonds reads lower than one heavy in unsecured business lending. Comparing banks needs care: one on internal models and one on the standardised table can hold similar loans at different densities, and that difference is about method as well as risk.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Risk-Weighted Assets: How One Borrower Is Weighted

US$7.5m drawn, US$11.8m of limits, and one number for capital.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

Risk-weighted assets tell a bank how much of its capital one customer is using. The figure does not come from the balance owed. It comes from every promise the bank has made to that customer, drawn or not, each converted into an exposure and multiplied by a weight that a regulator sets or a model estimates. A borrower with US$7.5m drawn and US$11.8m of limits can carry US$7.65m of weighted assets on the Basel standardised table. Capital is held against that number, which is why a facility's shape can matter as much as its size.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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PART OF What Is Corporate Banking?

// 01 — WHY ONE BORROWER HAS A CAPITAL FOOTPRINT

A bank's capital is finite, and regulators ration it by setting a minimum share of risk-weighted assets. Every facility therefore competes for the same stock. The book-level worked example shows how a whole balance sheet adds up and how the weight reaches the margin. This page goes one level down, to what a single customer's facilities consume.

An undrawn limit is not free. A committed line can be drawn on the day the borrower most needs it, which tends to be the day its credit is weakest. The rules deal with that by converting off-balance-sheet promises into an on-balance-sheet equivalent before any weight is applied. Credit risk is usually the largest part of a bank's total, and charges for market risk and operational risk are added to it.

// 02 — HOW THE FIGURE IS BUILT

Exposure = drawn balance + (undrawn or contingent amount × credit conversion factor)

RWA = exposure × risk weight

Capital = RWA × the capital ratio the bank runs to

Two routes set the weight. Under the standardised approach a regulator publishes the table. In the Basel framework an unrated corporate is weighted at 100% and an unrated corporate SME, under a sales limit, at 85%. The conversion factors are 40% for commitments, 10% for commitments the bank can cancel at any time without notice, 50% for performance bonds and 100% for guarantees of debt. Under an internal ratings approach, open only to banks a regulator has approved, the weight comes from a formula fed by the bank's own estimate of default and, on the advanced version, of loss, with an output floor limiting how far below the standardised result the total can go.

The tables are national. APRA's APS 112 gives 85% for unrated SME corporates in Australia and 75% for SME retail exposures under a size limit. Its conversion table has no 10% line: a cancellable line counts as a commitment at 40% unless it meets conditions that take it out of the definition. The UK's Basel 3.1 rules apply from 1 January 2027 for most of the package. New Zealand's Reserve Bank has issued more granular standardised weights, which banks may use from 1 October 2026 and must use by 1 April 2027. The example uses the Basel table for illustration; it is not any one regulator's current rate.

// 03 — THE EXAMPLE

A maker of school furniture, constructed for this page like every figure in it, is unrated with sales inside the Basel SME limit. Its bank has provided these facilities, in US$m. The overdraft can be cancelled at any time.

Facility Amount CCF Exposure Weight RWA

Term loan, drawn 6.00 – 6.00 85% 5.100

Revolver, drawn 1.50 – 1.50 85% 1.275

Revolver, undrawn 2.50 40% 1.00 85% 0.850

Overdraft, undrawn 1.00 10% 0.10 85% 0.085

Performance bonds 0.80 50% 0.40 85% 0.340

Total 11.80 9.00 7.650

A sixth of the weighted total comes from money the borrower has not drawn. The ratios below are the example's, not a market norm or a regulatory minimum.

Capital at 11% of RWA 7.65 × 11% = US$0.84m

Return wanted at 13% 0.84 × 13% = US$0.11m a year

Undrawn and contingent RWA 0.85 + 0.085 + 0.34 = 1.275 (16.7% of 7.65)

Capital return on that part 1.275 × 11% × 13% = about US$18,000 a year

US$2.0m of cash collateral 7.65 − (2.0 × 85%) = US$5.95m

The US$18,000 has to come from fees, since those lines earn no margin. The last line assumes US$2.0m of the term loan is secured by cash held at the bank under an agreement that meets the collateral rules. A charge over plant and general business assets would not have reduced the figure on this table, however much a credit officer values it. Capital rules recognise a narrower list of collateral than a lender does, and real estate has its own table.

// 04 — WHAT THE FIGURE IS NOT

Weighted assets are not expected loss. Expected loss is the average cost of lending, met by margin and provisions; capital is held for the loss beyond the average, in a bad year. Nor are they the balance sheet. A leverage ratio measures capital against unweighted exposure and is read alongside, and RWA density, weighted assets over total assets, compares the mix of one book with another.

A standardised weight is also not a view of this borrower. The same 85% goes to the strongest and the weakest unrated SME. At an internal-ratings bank the two differ, and a downgrade can raise the capital used with no change in the loan.

DEFINED IN ONE PARAGRAPH → · THE BOOK-LEVEL EXAMPLE → · EXPECTED LOSS →

// 05 — WHERE IT DECIDES A FILE

The figure often explains a request that otherwise looks arbitrary. A bank may ask a borrower to cancel a committed line it has not used in two years, because the line consumes capital and earns little. It may offer an overdraft on demand where a borrower wanted a commitment. Two banks can quote differently on the same loan because one is on internal ratings and the other on the standardised table.

In a capital-short year, an otherwise acceptable facility can fail on return rather than on credit, and the answer the borrower hears is that the bank has no appetite. Cash collateral, a smaller limit, a shorter commitment or a higher fee can each change the arithmetic. Which of them works depends on the regime the bank is under, and a lender on internal ratings will read tenor as well, since maturity enters that formula for many corporate loans.

HOW BANKS PRICE A BUSINESS LOAN → · HOW BANKS MANAGE CREDIT RISK →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Basel Committee on Banking Supervision, Basel Framework, CRE20 Standardised approach: individual exposures (version in force from 1 January 2023) — paragraphs 20.43, 20.47, 20.95, 20.97, 20.98 and 20.100 — Sets the 100% and 85% corporate weights and the 100%, 50%, 40% and 10% conversion factors used in sections 02 and 03.
Australian Prudential Regulation Authority, Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (in force 1 July 2025) — Attachment B, Table 12 — Sets 85% for unrated SME corporates and 75% for SME retail exposures in Australia — section 02.
Prudential Regulation Authority, PS1/26 Implementation of the Basel 3.1 final rules, January 2026 — Confirms 1 January 2027 for the UK package, with the market-risk internal model approach following on 1 January 2028 — section 02.

// QUESTIONS PEOPLE ASK

How do you calculate risk-weighted assets?: Multiply each exposure by its risk weight and add the results. Off-balance-sheet items are first converted into an exposure using a credit conversion factor, and financial collateral that meets the rules can reduce the exposure. A US$1m loan weighted at 100% adds US$1m; one weighted at 20% adds US$0.2m. The bank then adds charges for market risk and operational risk to reach total risk-weighted assets, which is the figure its capital ratio is measured against.
Do undrawn credit lines count towards risk-weighted assets?: Yes, in part. The undrawn amount is multiplied by a credit conversion factor before the risk weight applies. In the Basel framework the factor is 40% for a commitment and 10% for one the bank can cancel at any time without notice, which is why, on that table, a demand overdraft uses far less capital than a committed revolver of the same size. Regulators apply their own versions of these factors, and a facility's cancellation terms decide which one it receives.
What is RWA density?: Total risk-weighted assets divided by total assets. It shows how much of a bank's balance sheet counts for capital purposes, and is a shorthand for the riskiness of its mix. A book heavy in housing or government bonds reads lower than one heavy in unsecured business lending. Comparing banks needs care: one on internal models and one on the standardised table can hold similar loans at different densities, and that difference is about method as well as risk.
What is the difference between the standardised approach and the internal ratings-based approach?: The standardised approach applies a regulator's fixed table by type of exposure, with collateral recognised under set rules. The internal ratings-based approach, available only to banks a regulator approves, derives the weight from the bank's own estimate of default and, on the advanced version, of loss, run through a prescribed formula. It responds to each borrower's credit quality where the table does not. In exchange, internal models face supervisory validation, and an output floor stops the result falling too far below the standardised figure.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Regulatory reporting analystProduces the returns the bank's regulator relies on — capital, liquidity, large exposures, credit quality.
Treasury analystFunds the bank and manages the interest rate and liquidity risk created by its own balance sheet.
Financial accountantProduces and stands behind the bank's own numbers — the ledger, the close, the statutory accounts.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

WHAT THEY HEAR · THE BANK · FUNDING AND LIQUIDITY

A bank treasurer tells the credit committee: 'Deposits grew nicely this quarter — mostly from a few large corporate customers.'

What should the committee hear?

3 MORE ON THE BANK · FUNDING AND LIQUIDITY →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHRisk-weighted assets What are risk-weighted assets, and how do they set a bank's capital?