Knowledge

Foundation IRB

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Banks can determine their own estimation for some components of risk measure: the probability of default (PD), exposure at default (EAD) and effective maturity (M). The goal is to define risk weights by determining the cut-off points between and within areas of the expected loss (EL) and the
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Some credit assessments in standardised approach refer to unrated assessment. Basel II also encourages banks to initiate internal ratings-based approach for measuring credit risks. Banks are expected to be more capable of adopting more sophisticated techniques in credit risk management.
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unexpected loss (UL), where the regulatory capital should be held, in the probability of default. Then, the risk weights for individual exposures are calculated based on the function provided by Basel II.
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Below are the formulae for some banks' major products: corporate, small-medium enterprise (SME), residential mortgage and qualifying revolving retail exposure.
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Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework, Comprehensive Version (BCBS) (June 2006 Revision)
187: 387:) for non-retail portfolios. For retail exposures banks are required to use their own estimates of the IRB parameters (PD, LGD, CCF). Then total 492:
Basel-II benefits banks to hold lower capital requirement as having credit card product customers with lower probability of default (Graph 2).
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Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision)
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Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision)
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Basel-II benefits banks to hold lower capital requirement as having corporate customers with lower probability of default (Graph 1).
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for individual clients or groups of clients. Banks can use this approach only subject to approval from their local regulators.
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Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS)
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Reforms to the internal ratings-based approach to credit risk are due to be introduced under the
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Under this approach the banks are allowed to develop their own empirical model to estimate the
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Basel-II benefits SME customers to be treated differently from corporates.
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Basel-II benefits customers with lower probability of default.
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Under F-IRB banks are required to use regulator's prescribed
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is calculated as a fixed percentage of the estimated RWA.
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Basel II: Revised international capital framework (BCBS)
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and other parameters required for calculating the RWA (
531: 402:Some formulae in internal-ratings-based approach 324: 22:International regulatory standards for banks 331: 317: 396:Basel III: Finalising post-crisis reforms 444:13 Function is taken from paragraph 229 441:12 Function is taken from paragraph 328 438:11 Function is taken from paragraph 273 435:10 Function is taken from paragraph 272 532: 362:measurement techniques proposed under 31:Basel Committee on Banking Supervision 13: 14: 561: 468: 496: 481: 424: 414: 369:rules for banking institutions. 455:PD = the probability of default 355:internal ratings-based approach 1: 503: 307:Business and Economics Portal 358:, and it refers to a set of 264:Pillar 2: Supervisory review 121:Pillar 1: Regulatory capital 7: 374:PD (probability of default) 290:Pillar 3: Market disclosure 10: 566: 461:EAD = exposure at default 458:LGD = loss given default 381:LGD (Loss Given Default) 464:M = effective maturity 351:is an abbreviation of 545:Capital requirement 385:Risk-Weighted Asset 129:Capital requirement 341: 340: 23: 557: 500: 485: 428: 418: 389:required capital 367:capital adequacy 333: 326: 319: 272:Economic capital 239:Operational risk 21: 19:Basel Framework 16: 15: 565: 564: 560: 559: 558: 556: 555: 554: 530: 529: 506: 471: 404: 337: 113:Risk management 100:Monetary policy 20: 12: 11: 5: 563: 553: 552: 547: 542: 528: 527: 522: 517: 512: 505: 502: 494: 493: 490: 479: 478: 475: 470: 469:The advantages 467: 466: 465: 462: 459: 456: 446: 445: 442: 439: 436: 403: 400: 345:Foundation IRB 339: 338: 336: 335: 328: 321: 313: 310: 309: 303: 302: 301: 300: 292: 291: 287: 286: 285: 284: 279: 277:Liquidity risk 274: 266: 265: 261: 260: 259: 258: 257: 256: 251: 246: 236: 235: 234: 229: 219: 218: 217: 212: 202: 201: 200: 195: 194: 193: 190: 180: 179: 178: 173: 163: 153: 152: 151: 146: 141: 139:Leverage ratio 136: 123: 122: 118: 117: 116: 115: 106: 97: 85: 84: 80: 79: 78: 77: 76: 75: 74: 73: 68: 63: 58: 48: 43: 33: 25: 24: 9: 6: 4: 3: 2: 562: 551: 548: 546: 543: 541: 538: 537: 535: 526: 523: 521: 518: 516: 513: 511: 508: 507: 501: 499: 491: 488: 487: 486: 484: 476: 473: 472: 463: 460: 457: 454: 453: 452: 451: 443: 440: 437: 434: 433: 432: 429: 427: 422: 419: 417: 412: 408: 399: 397: 392: 390: 386: 382: 377: 375: 370: 368: 365: 361: 357: 356: 350: 346: 334: 329: 327: 322: 320: 315: 314: 312: 311: 308: 305: 304: 299: 296: 295: 294: 293: 289: 288: 283: 280: 278: 275: 273: 270: 269: 268: 267: 263: 262: 255: 252: 250: 247: 245: 242: 241: 240: 237: 233: 230: 228: 225: 224: 223: 220: 216: 213: 211: 208: 207: 206: 203: 199: 196: 191: 189: 186: 185: 184: 181: 177: 174: 172: 169: 168: 167: 164: 162: 159: 158: 157: 154: 150: 147: 145: 142: 140: 137: 135: 134:Capital ratio 132: 131: 130: 127: 126: 125: 124: 120: 119: 114: 110: 107: 105: 101: 98: 96: 92: 89: 88: 87: 86: 82: 81: 72: 69: 67: 64: 62: 59: 57: 54: 53: 52: 49: 47: 44: 42: 39: 38: 37: 36:Basel Accords 34: 32: 29: 28: 27: 26: 18: 17: 495: 480: 447: 430: 423: 420: 413: 409: 405: 393: 378: 371: 352: 348: 344: 342: 249:Standardized 210:Standardized 170: 104:Central bank 550:Credit risk 360:credit risk 353:foundation 205:Market risk 156:Credit risk 534:Categories 504:References 298:Disclosure 282:Legal risk 95:Regulation 83:Background 343:The term 51:Basel III 540:Basel II 364:Basel II 46:Basel II 431:Notes: 222:CVA vol 91:Banking 71:Endgame 41:Basel I 232:SA-CVA 227:BA-CVA 188:SA-CCR 149:Tier 2 144:Tier 1 349:F-IRB 244:Basic 176:A-IRB 171:F-IRB 161:SA-CR 109:Risk 66:FRTB 61:NSFR 448:In 347:or 254:AMA 215:IMA 198:CCF 192:IMM 183:EAD 166:IRB 56:LCR 536:: 398:. 111:/ 102:/ 93:/ 332:e 325:t 318:v

Index

Basel Committee on Banking Supervision
Basel Accords
Basel I
Basel II
Basel III
LCR
NSFR
FRTB
Endgame
Banking
Regulation
Monetary policy
Central bank
Risk
Risk management
Capital requirement
Capital ratio
Leverage ratio
Tier 1
Tier 2
Credit risk
SA-CR
IRB
F-IRB
A-IRB
EAD
SA-CCR
CCF
Market risk
Standardized

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