Internal Ratings-Based Approach

The Internal Ratings-Based (IRB) Approach is a method used by banks to assess the risk of their loans and investments. Instead of relying on external credit ratings, banks develop their own statistical models based on historical data and their specific experience with borrowers. This allows them to estimate how likely it is that a borrower will default, helping the bank determine how much capital it needs to hold as a safety cushion. By using their own ratings, banks can better tailor their risk management and lending practices to their unique portfolios.