Risk Weights for Credit Risk Under Internal Ratings Based Approach

Credit Risk the Internal Ratings-Based Approach.
The IRB approach is the most revolutionary change from the current Basel I. The calculation of risk-weighted assets under the IRB approach relies on the regulated bank's internal estimates of credit risk, notably the probability of default (PD) and loss given default (LGD) for all the credit exposures of a financial institution, adjusting for collateral, third-party support and, to some extent, maturity. This statistical approach better aligns bank regulators with the modern risk management practices of most leading global financial services groups. It shifts the focus of regulation from the application of rules from above to a more collaborative evaluation and monitoring of risk-management systems from within. The credit risk mitigation framework of the standardized approach applies to the IRB, with a few additional aspects added under IRB.