Optimization of Risk Weighted Assets: Algorithms and Insights

In the wake of the 2008 global financial crisis, the Basel III Accord imposed minimum capital requirements to strengthen the resilience of individual banks and thus enhance the stability of the international financial system. This in turn elevated the need to properly assess the banks risk-weighted assets, RWA. The case describes the evolution of approaches to calculating RWA for a certain class of assets at one of the largest banks in Europe, and presents a sample dataset from one of its subsidiaries on which students can practice implementing them. The case is suitable for instructors who want to expose students taking advanced analytics courses to the topics of linear and interger optimization and the related heuristics in a large-scale, big-impact problem setting.