Risk-Weighted Assets (RWA) density | What lies behind this underrated financial ratio

The objective of this article is to provide a new angle to the study of RWA (Risk-Weighted Assets) density. The worth of this ratio has long been underestimated by banks. Yet as analyses show, this tool may enable a more subtle approach to risk appraisal within a financial institution.

The first part of this article will cover the origins of the ratio and the history of its use in financial analysis. The second part will showcase its characteristics and behavioural traits, exemplified through a number of theoretical tests.

Finally, the last two parts of the article will put the theoretical value of RWA density to the test, by conducting a practical analysis of its behaviour in Europe over the 2012-2014 period.