RWA a CET1
Risk-Weighted Assets · CET1 · Basel · Bank Capital Adequacy
Risk-weighted assets and the mandatory capital buffer of a bank — the foundation of banking regulation and a key input for dividend capacity.
What it is
RWA (Risk-Weighted Assets): The bank's total assets recalculated according to their riskiness. A mortgage secured by real estate has a low risk weight (20–50%), an unsecured consumer loan a high one (75–150%), government bonds in local currency typically 0%.
RWA determines how much regulatory capital a bank must hold — the riskier the portfolio, the higher the RWA, the more capital needed.
CET1 (Common Equity Tier 1): The highest-quality component of the bank's regulatory capital — common stock + retained earnings. Expressed as a % of RWA.
CET1 ratio = CET1 capital / RWA
Minimum regulatory requirements (Basel III/IV):
- →Regulatory minimum: 4.5% CET1
- →Conservation buffer: +2.5%
- →Countercyclical buffer: 0–2.5% (depends on country and cycle)
- →SIFI surcharge: 1–3.5% (for systemically important banks)
In practice, large banks hold CET1 of 12–16%; management targets are typically 1–2% above the regulatory minimum.
Capital Buffer: The excess CET1 above the management target. Measures how much capital the bank can distribute (dividends, buybacks) or absorb in stress before hitting the regulatory floor.
Why track it
CET1 ratio is a key signal of a bank's financial strength:
- →Low CET1 buffer → limited dividends and buybacks → lower P/TBV
- →High CET1 buffer → room for distributions or shock absorption → valuation premium
RWA growth is a dangerous signal: if a bank grows RWA faster than earnings, the CET1 ratio falls — even without losses. Conversely, "RWA optimization" (shifting to lower risk weights) can artificially improve CET1.
Monitor CET1 sensitivity: how does a 1% drop in RWA affect CET1? And what size of loss would cost the bank 100 bps of CET1?
Real-world example
KB (Komerční banka) 2024:
- →CET1 ratio: ~19% — significantly above the minimum
- →Management target: ~14–15%
- →Excess capital: ~4–5% → room for above-standard dividends or a special payout
ING Group 2024:
- →CET1: ~14.3%, target ~12.5%
- →Buffer ~1.8% → limited room for aggressive buybacks
The difference in buffer directly affects the dividend outlook and P/TBV premium.
Watch out for
Basel IV (implementation 2025–2028) increases RWA for many portfolios — especially for banks using internal models (IRB). Their reported CET1 can fall without any change in actual risk. Monitor the published Basel IV impact and the "output floor."
CET1 ratio is a regulatory number, not a natural measure of capital strength — two banks with the same CET1 can have very different actual resilience depending on the quality of assets within their RWA.