RWA, or Risk Weighted Asset
is used in the financial markets
a measure of liquidity
To calculate RWA the nominal
, or stated value of an asset - for example, real estate
s or bond
s - is multipled by a real number
which is always less than one.
This number is intended to approximate how quickly and easily this asset can be converted to cash
Consider an individual who wishes to borrow money
from a bank
or other such institution, and is asked to provide some form of collateral
Perhaps she has two assets that would be acceptable as collateral - a plot of land
or 1,000 shares
of IBM stock. Consider for the sake of illustration
that each asset is worth $200,000.
may consider the land - in risk weighthed asset terms
- as only worth $100,000 as collateral, or $200,000 * 0.5.
By the same token the bank may consider the IBM stock to be worth - once again in risk weighted asset terms
- as $180,000 as collateral, or $200,000 * 0.9.
Each of these calculations are intended to express numerically how quickly and easily the asset can be converted to cash.