A default risk weight quantifies the perceived risk associated with a bank asset, primarily loans, based on borrower creditworthiness. This figure, mandated by banking regulations such as the Basel Accords, drives how much capital a bank must hold to protect against potential loan defaults. Essentially, higher risk weights mean greater chances of loss from defaults, requiring banks to keep more capital on hand.
For example, loans to the U.S. government typically carry a 0% risk weight because they are considered nearly risk-free. Residential mortgages may have risk weights between 35% to 50%, reflecting their secured nature. Standard commercial loans and small business loans generally have a 100% risk weight, indicating higher risk. Past-due loans—those overdue by 90 days or more—often receive risk weights of 150% or more, reflecting significantly elevated default risk.
Banks calculate risk-weighted assets (RWAs) by multiplying each asset’s value by its default risk weight. They then hold a percentage of the total RWAs—commonly around 8%—as capital reserves. This capital acts as a financial buffer, ensuring banks stay solvent even if some loans default.
For borrowers, the default risk weight indirectly influences loan terms. Higher risk weights make loans costlier for banks, which often leads to higher interest rates, stricter collateral requirements, or reduced loan amounts. Improving your business credit profile, providing strong collateral, and maintaining clear financial records can lower your risk weight in the lender’s view, resulting in better loan offers.
Learn more about managing risk and loan qualifications with our articles on Personal Loan Underwriting and Credit Score.
Understanding default risk weight helps you see why banks treat different loans differently and how this impacts your borrowing costs and approval chances. By positioning yourself as a lower-risk borrower, you increase your likelihood of obtaining favorable loan terms and better financing options.
For further detail on regulatory requirements, see the Federal Reserve’s guide to the Basel III Capital Framework.
Sources:
- Investopedia, “Risk-Weighted Asset (RWA): Definition, Calculation, and Example” (https://www.investopedia.com/terms/r/riskweightedassets.asp)
- Federal Reserve, “A Deeper Dive Into the U.S. Basel III Capital Framework” (https://www.federalreserve.gov/publications/community-banking-connections/2014/a-deeper-dive-into-the-us-basel-iii-capital-framework.htm)
- Corporate Finance Institute, “Risk Weights” (https://corporatefinanceinstitute.com/resources/knowledge/finance/risk-weights/)
(Last updated 2025)
