Why is a mortgage weighted less than a business loan?

Because, across a whole book and a whole cycle, a loan secured on a house to a household has lost banks far less than an unsecured loan to a company, and the weight is a standing estimate of that difference. The weight is not a judgement about one borrower — a well-run business can be a better credit than a stretched household — but about the category, which is what a capital rule has to be written on. A bank's own models can refine the category weights where a regulator lets them, and the refinement is itself a risk the regulator watches.

What is a capital ratio?

The bank's capital divided by its risk-weighted assets. Capital is the money that can absorb a loss without anyone the bank owes going unpaid — shareholders' funds, in the main — and the ratio says how much of the weighted book that money would cover. A requirement is set as a minimum ratio with buffers on top; a bank that falls towards it stops growing its lending until it has raised more capital or shed weighted assets, which is why a capital ratio is read as a limit on growth as much as a cushion against loss.

What is the difference between risk-weighted capital and the leverage ratio?

The leverage ratio divides the same capital by the bank's assets unweighted — every dollar counts as a dollar, whatever it is lent against. It exists because weights can be wrong, or gamed, and a bank that is comfortably capitalised on the weighted measure can still be very thinly capitalised against its plain balance sheet. The two are read together: the weighted ratio for how risky the book is, the leverage ratio for how big it is.

How does the bank's capital affect the margin on my loan?

Through the charge for the capital your loan uses. A loan at a 100% weight, at a bank that holds 10% capital against its weighted assets and wants a 12% return on that capital, has to earn 1.2% of its amount each year for the shareholders before it covers its expected loss or its costs. The same loan at a 35% weight needs 0.42%. That difference is why a bank prices a secured residential loan differently from an unsecured business one even when it expects neither to default, and why a loan that uses capital cheaply can be offered more keenly.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Risk-Weighted Assets: a Worked Example

The balance sheet a bank's capital is measured against.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-10-11

// THE SHORT ANSWER

Risk-weighted assets are a bank's loans and other exposures, each multiplied by a weight that reflects how likely the bank is to lose money on it, so that a mortgage counts for less than an unsecured business loan and government bonds for little or nothing. A bank's capital requirement is a share of that total, not of its plain balance sheet: US$10bn of assets can be US$6bn risk-weighted, and at an 8% requirement the bank must hold US$480m of capital against them. For a lending desk the weight is part of the price, because a loan that uses more capital has to earn more to be worth writing.

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.

// WORK THE SUM

Every Groundwork file that is a number to work out — cash conversion, debt service cover, expected loss, risk-weighted assets, the margin on a bank's own book — with the working shown in the senior read. One minute each, no signup.

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// 01 — WHY THE ASSETS ARE WEIGHTED

A bank holds capital so that losses fall on its shareholders before they fall on its depositors. How much capital depends on how much it could lose, and a dollar lent to a government is not a dollar lent to a start-up. So each asset is multiplied by a weight that stands for its chance of loss, and the capital requirement is set against the weighted total rather than the plain one:

Risk-weighted assets = Σ (exposure × risk weight)

Capital requirement = risk-weighted assets × minimum ratio

Capital ratio = capital held ÷ risk-weighted assets

The weights are set by the regulator for most banks and refined by their own models at the largest; the figures below are illustrative of the idea, not any regime's table. The glossary entry defines the term; this page works a book.

// 02 — THE EXAMPLE

A bank — constructed for this page — holds US$10bn of assets in four kinds, and US$700m of capital.

Government bonds 2,000 × 0% = 0

Residential mortgages 3,000 × 35% = 1,050

Business loans 4,000 × 100% = 4,000

Other assets 1,000 × 100% = 1,000

Risk-weighted assets = 6,050 (on a US$10,000m balance sheet)

Requirement at 8% = 484

Capital ratio = 700 ÷ 6,050 = 11.6%

The bank's balance sheet is US$10bn; the balance sheet its capital is measured against is US$6bn. At an 8% requirement it must hold US$484m, and it holds US$700m — a ratio of 11.6%, with US$216m of room. That room is its capacity to grow: at a 100% weight it could write roughly US$2.7bn more business loans before touching the minimum, or US$7.7bn more mortgages, which is the arithmetic behind a bank that is keen to lend on houses and careful about lending to companies in the same month.

// 03 — THE WEIGHT AS PART OF THE PRICE

Every loan uses some of that room, and the shareholders expect a return on the capital it ties up. Suppose the bank runs at 10% capital against weighted assets and wants a 12% return on it:

Business loan at 100%: 100% × 10% × 12% = 1.20% of the loan, each year, for the capital alone

Mortgage at 35%: 35% × 10% × 12% = 0.42%

That 1.20% is the "return on capital held" line in the margin built on the expected loss page, and it is why a bank reads the return on a loan against the capital it uses rather than against its amount — a US$2m loan at a 100% weight has to earn the bank more than a US$5m loan at 35%.

WORK IT · THE NUMBER → · RETURN ON CAPITAL, THE CALL → · CAPITAL BACK TO 9%, THE NUMBER →

// 04 — WHERE IT REACHES THE LENDING DESK

A desk rarely sees the weight written down, but it meets it as the hurdle a loan has to clear and as the reason a bank's appetite for a sector can change with no change in the sector. When capital is short, growth stops at the margin; when a book is concentrated, the same weight buys less comfort. The machine and the credit risk function are where the rule turns into a limit.

CAPITAL AS A LIMIT ON GROWTH → · PROVISION COVERAGE → · NET INTEREST MARGIN →

// STANDARDS THIS SITS BESIDE

The recognised ground this page sits beside. Each was opened and checked when cited; none is a source for the framework itself.

Basel Committee on Banking Supervision, Basel Framework, RBC20 — Calculation of minimum risk-based capital requirements, paragraphs 20.1–20.3 — A bank must meet its capital requirements at all times as minimum shares of risk-weighted assets, calculated for credit, market and operational risk — section 01.
Basel Committee on Banking Supervision, Basel Framework, CRE20 — Standardised approach, paragraphs 20.1 and 20.43 — Under the standardised approach, risk-weighted assets are the standardised risk weight times the exposure, and where external ratings are used an unrated corporate exposure takes a full weight — the arithmetic in section 02.
Basel Committee on Banking Supervision, An Explanatory Note on the Basel II IRB Risk Weight Functions (July 2005) — section 2 — One function of bank capital is to protect the bank's debt holders against losses larger than expected — why the capital sits in front of the depositors, section 01.

// QUESTIONS PEOPLE ASK

Why is a mortgage weighted less than a business loan?: Because, across a whole book and a whole cycle, a loan secured on a house to a household has lost banks far less than an unsecured loan to a company, and the weight is a standing estimate of that difference. The weight is not a judgement about one borrower — a well-run business can be a better credit than a stretched household — but about the category, which is what a capital rule has to be written on. A bank's own models can refine the category weights where a regulator lets them, and the refinement is itself a risk the regulator watches.
What is a capital ratio?: The bank's capital divided by its risk-weighted assets. Capital is the money that can absorb a loss without anyone the bank owes going unpaid — shareholders' funds, in the main — and the ratio says how much of the weighted book that money would cover. A requirement is set as a minimum ratio with buffers on top; a bank that falls towards it stops growing its lending until it has raised more capital or shed weighted assets, which is why a capital ratio is read as a limit on growth as much as a cushion against loss.
What is the difference between risk-weighted capital and the leverage ratio?: The leverage ratio divides the same capital by the bank's assets unweighted — every dollar counts as a dollar, whatever it is lent against. It exists because weights can be wrong, or gamed, and a bank that is comfortably capitalised on the weighted measure can still be very thinly capitalised against its plain balance sheet. The two are read together: the weighted ratio for how risky the book is, the leverage ratio for how big it is.
How does the bank's capital affect the margin on my loan?: Through the charge for the capital your loan uses. A loan at a 100% weight, at a bank that holds 10% capital against its weighted assets and wants a 12% return on that capital, has to earn 1.2% of its amount each year for the shareholders before it covers its expected loss or its costs. The same loan at a 35% weight needs 0.42%. That difference is why a bank prices a secured residential loan differently from an unsecured business one even when it expects neither to default, and why a loan that uses capital cheaply can be offered more keenly.

THE IN-TRAY · ONE MINUTE

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THE NUMBER · THE BANK · CAPITAL

A bank has US$10bn of loans: half to companies, half home mortgages. Suppose the capital rules weight company loans at 100% and these mortgages at 35%.

What are its risk-weighted assets?

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