A method allowing banks to use their own estimates of default probability, and in some cases loss given default and exposure, to compute credit capital. Supervisors must approve it.
Where you will meet it
Internal ratings-based approach comes up in 7 learning outcome notes across the FRM syllabus.
A few of them:
Credit Scoring and Retail Credit Risk Management FRM Part II · Credit risk measurement and management
“Under Basel IRB, retail default can be defined at the facility level rather than the obligor level.”
Integrated Risk Management FRM Part II · Operational risk and resilience
“The IRB credit formula uses a 99.9 percent one-year worst-case default rate, WCDR, and charges capital for the unexpected part only.”
Credit Value at Risk FRM Part II · Credit risk measurement and management
“The Basel II IRB approach applies it at 99.9 percent over one year.”
Capital Regulation Before the Global Financial Crisis FRM Part II · Operational risk and resilience
“It has more risk-sensitive credit risk charges (standardized, foundation IRB, advanced IRB), market risk as before, and a new operational risk charge.”
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