Top 1000 World Banks - Western Europe sees RWAs drop as global figure holds steady

Western Europe experienced a 6.3% decrease in aggregated risk-weighted assets (RWAs), to $12,682bn, during the 2018 review period of the Top 1000 World Banks ranking. This is a major turnaround following a jump of 16.2% in 2017. It is a positive indication that some of the de-risking work being done in one of the world’s most mature banking markets is beginning to pay off, as its biggest banks continue in their efforts to cut their RWAs.

Latin America and Japan were the only other regions that saw drops, of 3.5% and 0.6%, respectively. The rest of the world saw rises in RWAs for the second year running. Africa saw the biggest jump, up 9.2% year-on-year, followed by the Middle East, which saw an increase of 6.3%. However, overall, the 2019 Top 1000’s combined RWAs remained at the same level as last year’s edition, at $59,909bn.

RWAs, which are assets or off-balance-sheet exposures weighted according to risk, are important to understand the strength and resilience of a bank. Under the Basel Accord, they form half of the equation that calculates financial institutions’ capital adequacy ratios and are decisive in determining how much equity capital a bank must keep to lessen the risk of insolvency under Basel III.

RWA density, another important metric, compares total RWAs with a financial institution’s total balance sheet, and it may be interpreted as a measure of the average relative risk of a bank’s overall operations. It is a tool commonly used by banks to better monitor their internal activities, or compare themselves to their peers.

The Top 1000 ranking sees a modest increase in RWA density of just 36 basis points year on year, to 48.8%. Only two regions, western Europe and North America, experienced contractions in their ratios in the 2019 ranking. Western Europe had the lowest RWA density, at 32.6%; North America, on the other hand, was almost double, at 59.4%.

As with previous years, central and eastern Europe (CEE) continued to move in the wrong direction in 2018. The region retains its crown as having the highest RWA density in the world and, in 2018, also saw the biggest rise in the ratio by more than 5 percentage points. However, this year’s increase was almost half that of the previous year.

Russian banks continue to be the main contributors to the accumulation of risk in the CEE’s asset portfolio. Five out of the top 10 banks with the highest RWA density are from Russia, including Russian Standard Bank, Tinkoff Bank and Sberbank – all with RWA-to-total assets ratios of more than 100%.

However, GFH Financial Group from Bahrain remains the bank with the highest RWA density, with a ratio of 161%. Oman’s Bank Dhofar, Bahrain’s First Energy Bank and Saudi Arabia’s Riyad Bank join GFH in the top 10 banks with the highest RWA density, all with ratios of about 100%. Overall, the Middle East region has the second highest RWA density, at 69.5%.

Both Africa and Latin America and the Caribbean are also continuing to build up risk in their asset bases, albeit at a slower pace than in the 2017 review period. For example, Africa has increased its RWA density by more than 3 percentage points, to 54.1%, compared with 13 percentage points in last year’s edition. Latin America’s ratio has risen by only 2 percentage points, compared with triple that last year.

China, Japan and the wider Asia-Pacific region have seen very muted rises in RWA density, of under 100 basis points each. China has held steady for the past five years, with it ratio hovering around 60%; however, this is well above the global average.

The next round of the Basel Committee on Banking Supervision’s reforms (dubbed Basel IV) will phase in from January 2022. These rules are expected to be harder on banks using internal risk models, such as the large investment banks, as they will be subject to an output floor.

Risk-Weighted Assets - Regional Breakdown