Advanced Internal Ratings-Based (AIRB) Approach

The Advanced Internal Ratings-Based (AIRB) Approach is a method used by banks to estimate the amount of capital they need to hold against potential loan losses. Instead of using standard formulas, banks use their own internal models, which are based on detailed data and sophisticated calculations about borrower risk and loan types. This approach allows banks with advanced risk management systems to more accurately assess credit risk, potentially leading to lower capital requirements compared to simpler methods. It aims to make the banking system safer while promoting efficient risk-taking and capital allocation.