Risk-weighted assets are used in regulatory capital to calculate which ratio?

• A. CET1 capital divided by risk-weighted assets
• B. Risk-weighted assets divided by CET1 capital
• C. The sum of CET1 and risk-weighted assets
• D. CET1 capital times risk-weighted assets

Answer: (A)

This question tests how regulatory capital is tied to risk through a ratio. Risk-weighted assets assign higher weight to-riskier assets so they reflect the level of risk a bank takes. The ratio that shows how much high-quality capital (CET1) a bank has to cover that risk is CET1 capital divided by risk-weighted assets. This CET1 ratio is a key measure of loss-absorbing capacity under Basel III.

The other ways of combining CET1 and risk-weighted assets aren’t used as a regulatory ratio: dividing risk-weighted assets by CET1 would invert the metric, adding them together mixes different units, and multiplying would not yield a meaningful regulatory ratio.