Kennisbank / Capitalizing unexpected losses with A-IRB

Capitalizing unexpected losses with A-IRB

Risicomanagement Magazine De Actuaris Bankensector
Kennisbank •
Janneke van Schijndel FRM MSc, Rick Stuhmer FRM MSc

Banks are exposed to many types of risks. Amongst the risk spectrum, credit risk is by far the largest and most elemental risk for a bank. It broadly refers to the probability that a client cannot (fully) repay its loan(s) and the losses the bank is therefore exposed to. To ensure that banks are able to endure such losses without becoming insolvent, international regulations have been imposed with respect to minimum capital requirements for unexpected losses.

Capitalizing unexpected losses with A-IRB

In 1988 the Basel Committee of Banking Supervision (BCBS) released a set of minimal capital requirements for banks, known as Basel I or the Basel Accords. Since first introduction, many more additional regulations and extensions have been published. The enhancements of the requirements in the Accords over the years show a shift from initial simplicity to more risk-sensitive requirements. In order to come up with risk-sensitive capital requirements the internal ratings-based approach (IRB) has been developed. This article will discuss the IRB approach and some parallels for banks, insurance companies and

pension funds with respect to the calculation of credit risk.

 

What is A-IRB?

The advanced internal ratings-based approach (A-IRB) is a specific version within the IRB-framework for the banking and financial industry that supports the institution’s measurement of credit risk using its own (advanced) internal models. It was initially proposed in 2004(1) as part of the Basel II capital adequacy rules to enhance the levels of trust, transparency, consistency and compliance in the capital markets playing field.

 

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