Internal Rating Based approach (IRB)
The Internal Rating Based approach (IRB) allows banks to asses their credit risk using their own models. The approach is split into two possible methods, between which a bank must choose, Foundation and Advanced.
In this chapter the general logic behind the IRB approach is explained. This is followed by an explanation of the difference between the two methods (Foundation and Advanced). Finally the different types of assets for which the credit risk must be assessed are explained.