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RWA Optimization: The Path to Efficient Capital Management in Banks

Nidhi Samdani

Senior Business Consultant, CFO Strategic Initiatives, Banking, Financial Services, and Insurance, TCS

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Ensuring accurate RWA calculation for effective capital adequacy in banks

The COVID-19 crisis has resulted in increased loan loss provisions and risk-weighted assets (RWA) for financial institutions. This has led to falling returns and capital ratios in turn affecting capital adequacy in banks. To better manage the impact on capital, banks will need to improve decision making in areas like liquidity, asset-liability management, and capital planning while also exploring various avenues to augment capital.

RWA optimization is one way to free up capital and ease the burden of capital management in banks. However, banks face challenges in ensuring accurate RWA calculations due to poor RWA models, data issues, and faulty implementation. Improving the accuracy of RWA calculations has thus become vital for efficient capital management in banks. To achieve this, banks must:

  • Release capital from areas of inefficient use

  • Identify and fix leakages from poor data linkages

  • Tighten the capital allocation process

  • Leverage technology to boost decision-making

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