In times of distress, however, banks and other financial institutions seek to reduce their exposure to risk. To do so, they move to reduce their illiquid investments, including some loans, and increase their liquidity. This process is what is known as "deleveraging".
Banks must provide information on their capital ratio which includes a risk-adjusted measure of banks’ assets (riskweighted assets). New Zealand banks use either a standardised approach to risk-weights (prescribed by the Reserve Bank), or an approach based on internal modelling and various regulatory formula (currently used by the big-4 banks).