Internal Ratings-Based (IRB) Approach

The Internal Ratings-Based (IRB) Approach is a method banks use to determine the amount of capital they need to hold against loans and credit risk. Banks develop their own models to assess the likelihood that borrowers will default and the potential loss if they do. By accurately estimating these risks, banks can hold sufficient capital, which helps ensure financial stability and compliance with regulations. The IRB approach allows banks with strong risk management practices to tailor their capital requirements more precisely than standardized methods.