In case anybody still doubted that RWAs affect banks’ lending allocation…
Just a very very quick post tonight.
Our business is constrained by the capital we have available to cover risk-weighted assets (RWA) resulting from the risks in our business, by the size of our on- and off-balance sheet assets through their contribution to leverage ratio requirements and regulatory liquidity ratios, and by our risk appetite. Together, these constraints create a close link between our strategy, the risks that our businesses take and the balance sheet and capital resources that we have available to absorb those risks. As described in “Equity attribution framework” in the “Capital management” section of this report, our equity attribution framework reflects our objectives of maintaining a strong capital base and guiding businesses towards activities that appropriately balance profit potential, risk, balance sheet and capital usage.
Where does this come from? The 2013 annual report of UBS, the largest Swiss bank (page 150).
How banks are incentivised by Basel’s risk-weighted assets is clear. What provides has a low capital treatment (= low RWA), has relatively low default risk, is highly collateralised, even though it doesn’t bring in much interest income? Yep, mortgages (as well as some tranches of securitised products such as RMBSs, and sovereign debt).