The Bankwatch

Tracking the consumer evolution of financial services

RWA (Really Weird Accounting) otherwise known as Risk Weighted Assets

Banks are required to hold capital relative to their assets (loans).  Different types of loans have different capital requirements,

Banks turn to financial alchemy in search for capital

So the safest securities, such as US Treasuries, do not count as assets at all for the ratio, but the riskiest – such as long-term structured credit assets – count at double their stated value or more.

The result is that banks and the most outspoken hawkish banks are quite outspoken about it are actively managing their balance sheets to minimise capital requirements resulting in a classic case of unintended consequences and certainly not the consequence that was intended which was to reduce bank balance sheet risk.

Jamie Dimon, JPMorgan’s chief executive, said last week that he intended to “manage the hell out of RWA” to reach the higher levels. Morgan Stanley revealed that its risk-weighted assets had ballooned by $44bn after the Fed said the bank was managing the hell out of its assets too much and told it to stop.

Relevance to Bankwatch:

All this to suggest that we are no closer to any kind of systemic improvement in bank condition nor even agreement that we need an improvement.

Written by Colin Henderson

October 25, 2011 at 08:56

Posted in Uncategorized

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