I was asked a question regarding a comment I made on a previous post (the one on the ANZ numbers) about the EAD and RWA numbers. I copy my response below in case it is of more general interest.
There are two measures of total outstanding assets in the disclosures (other than the CBA which seem to have thrown in the kitchen sink). One is the RWA or risk weighted assets which is the number left after the capital weights have been applied – a number that we do not know but will always be a percentage of the total. The EAD (exposure at default) is the value for what the exposure would be in the event it goes into default. It is likely to be close to either the current exposure or the facility limit.
If that was gobbledygook – let’s say a borrower has a credit card with a limit of $25k but a balance of $1k. In accounting terms you have a $1k exposure with $24k undrawn. However, normally people draw everything they can on a credit card to try to stave off bankruptcy so, just prior to going under most people will draw the card down to $25k (or more – and I have seen lots more), meaning for that $1k exposure you may have an $26 or $27k EAD figure.
The RWA for this may be any number from $0 (if they typically recover all the outstanding) to $26 or $27k (if they typically lose it all). The recovery rate varies from bank to bank and product to product, so the EAD is the closest number you will get in these disclosures to the actual (accounting) amount outstanding.
Neither of these is going to be the amount currently outstanding on the assets (or current value) but the EAD is going to be much closer, particularly for the Bank and sovereign exposures which typically arrtact a near zero risk weight. I therefore use the EAD, but it will never equate to the exact numbers in any accou