RWA
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,
stocks or
bonds - 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.
The
bank 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.