This chapter sets out an overview of the internal ratings-based approach to credit risk, including the categorisation of exposures, a description of the available approaches and the roll-out requirements.

Version effective as of 01 Jan 2023

Changes due to the December 2017 Basel III publication and the revised implementation date announced on 27 March 2020.

Overview

30.1 This chapter describes the internal ratings-based (IRB) approach for credit risk. Subject to certain minimum conditions and disclosure requirements, banks that have received supervisory approval to use the IRB approach may rely on their own internal estimates of risk components in determining the capital requirement for a given exposure. The risk components include measures of the probability of default (PD), loss given default (LGD), the exposure at default (EAD), and effective maturity (M). In some cases, banks may be required to use a supervisory value as opposed to an internal estimate for one or more of the risk components.

30.2 The IRB approach is based on measures of unexpected losses (UL) and expected losses. The risk-weight functions, as outlined in CRE31, produce capital requirements for the UL portion. Expected losses are treated separately, as outlined in CRE35.