Foundation IRB

Foundation IRB

The term "Foundation IRB" or "F-IRB" is an abbreviation of "foundation internal ratings-based approach" and it refers to a set of credit risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions.

Under this approach the banks are allowed to develop their own empirical model to estimate the PD (probability of default) for individual clients or groups of clients. Banks can use this approach only subject to approval from their local regulators.

Under F-IRB banks are required to use regulator's prescribed LGD (Loss Given Default) and other parameters required for calculating the RWA (Risk Weighted Asset). Then total required capital is calculated as a fixed percentage of the estimated RWA.

ome formulae in Internal-ratings-based approach

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.

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 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.

Below are the formulae for some banks’ major products: corporate, small-medium enterprise (SME), residential mortgage and qualifying revolving retail exposure.

Notes:
*10 Function is taken from paragraph 272
*11 Function is taken from paragraph 273
*12 Function is taken from paragraph 328
*13 Function is taken from paragraph 229

In [http://www.bis.org/publ/bcbs118.htm Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision)]

*PD = the probability of default
*LGD = loss given default
*EAD = exposure at default
*M = effective maturity

The advantages

*Basel-II benefits customers with lower probability of default.
*Basel-II benefits banks to hold lower capital requirement as having corporate customers with lower probability of default (Graph 1).
*Basel-II benefits SME customers to be treated differently from corporates.
*Basel-II benefits banks to hold lower capital requirement as having credit card product customers with lower probability of default (Graph 2).

References

* [http://www.bis.org/publ/bcbsca.htm Basel II: Revised international capital framework (BCBS)]
* [http://www.bis.org/publ/bcbs107.htm Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS)]
* [http://www.bis.org/publ/bcbs118.htm Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision)]
* [http://www.bis.org/publ/bcbs128.pdf Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework, Comprehensive Version (BCBS) (June 2006 Revision)]


Wikimedia Foundation. 2010.

Нужно сделать НИР?

Look at other dictionaries:

  • IRB-подход — (англ. Internal Risk Based Approach) подход к оценке кредитных рисков банков для целей оценки достаточности регулятивного капитала, основанный на использовании внутренних рейтингов заемщиков, то есть рейтингов, устанавливаемых самими банками …   Википедия

  • Timeline of foundation of national rugby unions — This timeline lists the foundation dates of the national governing bodies for rugby union mdash;known as rugby unions or federations. The first union was the Rugby Football Union (RFU) that was founded in 1871 to govern rugby union within England …   Wikipedia

  • Loss given default — Basel II Bank for International Settlements Basel Accords Basel I Basel II Background Banking Monetary policy Central bank Risk …   Wikipedia

  • Loss given default (LGD) — Loss Given Default or LGD is a common parameter in Risk Models and also a parameter used in the calculation of Economic Capital or Regulatory Capital under Basel II for a banking institution. This is an attribute of any exposure on bank s… …   Wikipedia

  • Basel II Accord — Basel II (also known as Βασιλεία ΙΙ in Greek) is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially… …   Wikipedia

  • Standardized approach — According to International Convergence of Capital Measurement and Capital Standards, known as Basel II, the standardized approach is a set of risk measurement techniques for banking institutions. The term may be used in the context of credit risk …   Wikipedia

  • Standardized approach (credit risk) — The term standardized approach (or standardised approach) refers to a set of credit risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions.Under this approach the banks are required to use ratings from …   Wikipedia

  • Basilea II — es el segundo de los Acuerdos de Basilea. Dichos acuerdos consisten en recomendaciones sobre la legislación y regulación bancaria y son emitidos por el Comité de supervisión bancaria de Basilea. El propósito de Basilea II, publicado inicialmente… …   Wikipedia Español

  • List of prizes, medals, and awards — A list of famous prizes, medals, and awards including badges, bowls, cups, state decorations, trophies, etc. Contents 1 Business and management 2 Entertainment 2.1 Advertising …   Wikipedia

  • Gaelic Athletic Association — Cumann Lúthchleas Gael Formation 1 November 1884 (1884 11 01) (127 years ago) Type …   Wikipedia

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”