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Advanced IRB Article Talk Read Edit View history Search Wikipedia Advanced IRB From Wikipedia, the free encyclopedia Main page The term Advanced IRB or A-IRB is an abbreviation of advanced internal ratings-based Bank regulation and Contents approach, and it refers to a set of credit risk measurement techniques proposed under standards Featured content Basel II capital adequacy rules for banking institutions. Bank for International Settlements · Current events Basel Accords (Basel I, Basel II, Basel III, Under this approach the banks are allowed to develop their own empirical model to quantify Random article Basel IV) · Financial Stability Board required capital for credit risk. Banks can use this approach only subject to approval from Donate to Wikipedia Background Wikipedia store their local regulators. Banking (Regulation) · Monetary policy · Under A-IRB banks are supposed to use their own quantitative models to estimate PD Central bank · Risk · Risk management · Interaction Regulatory capital · Tier 1 · Tier 2 (probability of default), EAD (exposure at default), LGD (loss given default) and other Help Pillar 1: Regulatory capital parameters required for calculating the RWA (risk-weighted asset). Then total required About Wikipedia Credit risk · Standardized · IRB Approach · Community portal capital is calculated as a fixed percentage of the estimated RWA. F-IRB · A-IRB · PD · LGD · EAD · Recent changes Operational risk · Basic · Standardized · AMA · Contact page Contents [hide] Market risk · Duration · Value at risk 1 Some formulae in internal-ratings-based approach Pillar 2: Supervisory review Tools 1.1 Corporate Exposure Economic capital · Liquidity risk · Legal risk What links here 1.1.1 Correlation Pillar 3: Market disclosure Related changes 1.1.2 Maturity adjustment Disclosure Upload file 1.1.3 Capital requirement Business and Economics Portal Special pages Permanent link 1.1.4 Risk-weighted assets V · T · E Page information 1.2 Corporate exposure adjustment for SME Wikidata item 1.2.1 Correlation Cite this page 1.3 Residential mortgage exposure 1.3.1 Correlation Print/export Create PDF in your applications with the Pdfcrowd HTML to PDF API PDFCROWD Create a book 1.3.2 Capital Requirement Download as PDF 1.3.3 Risk-weighted assets Printable version 1.4 Qualifying revolving retail exposure (credit card product) Languages 1.4.1 Correlation 1.4.2 Capital Requirement Bahasa Indonesia Edit links 1.4.3 Risk-weighted assets 2 The advantages 3 External links 4 References Some formulae in internal-ratings-based approach [ edit ] Some credit assessments in standardised approach refer to unrated assessment. Basel II also encourages banks to initiate internal ratings-based approach for measuring credit risks. Banks are expected to be more capable of adopting more sophisticated techniques in credit risk management. Banks can determine their own estimation for some components of risk measure: the probability of default (PD), loss given default (LGD), exposure at default (EAD) and effective maturity (M). For public companies, default probabilities are commonly estimated using either the structural model of credit risk proposed by Robert Merton (1974) or reduced form models like the Jarrow-Turnbull model. For retail and unlisted company exposures, default probabilities are estimated using credit scoring or logistic regression, both of which are closely linked to the reduced form approach. The goal is to define risk weights by determining the cut-off points between and within areas of the expected loss (EL) and the unexpected loss (UL), where the regulatory capital should be held, in the probability of default. Then, the risk weights for individual exposures are calculated based on the function provided by Basel II. Create PDF in your applications with the Pdfcrowd HTML to PDF API PDFCROWD Below are the formulae for some banks’ major products: corporate, small-medium enterprise (SME), residential mortgage and qualifying revolving retail exposure. S being Min(Max(Sales Turnover,5),50 ) In the formulas below, N(x) denotes the normal cumulative distribution function G(z) denotes the inverse cumulative distribution function PD is the probability of default LGD is the loss given default EAD is the exposure at default M is the effective maturity Corporate Exposure [ edit ] The exposure for corporate loans is calculated as follows[1] Correlation [ edit ] Create PDF in your applications with the Pdfcrowd HTML to PDF API PDFCROWD AVC[2] (Asset Value Correlation) was introduced by the Basel III Framework, and is applied as following : if the company is a large regulated financial institution (total asset equal or greater to US $100 billion) or an unregulated financial institution regardless of size else Maturity adjustment [ edit ] Capital requirement [ edit ] Risk-weighted assets [ edit ] Corporate exposure adjustment for SME [ edit ] For small and medium enterprises with annual Sales Turnover below 50 million euro, the correlation may be adjusted as follows:[3] Correlation [ edit ] In the above formula, S is the enterprise's annual sales turnover in millions of euro. Residential mortgage exposure [ edit ] The exposure related to residential mortgages can be calculated as this[4] Correlation [ edit ] Create PDF in your applications with the Pdfcrowd HTML to PDF API PDFCROWD Capital Requirement [ edit ] Risk-weighted assets [ edit ] Qualifying revolving retail exposure (credit card product) [ edit ] The exposure related to unsecured retail credit products can be calculated as follows:[5] Correlation [ edit ] Capital Requirement [ edit ] Risk-weighted assets [ edit ] The advantages [ edit ] Basel-II benefits customers with lower probability of default. Basel-II benefits banks to hold lower capital requirement as having corporate customers with lower probability of default (Graph 1). Create PDF in your applications with the Pdfcrowd HTML to PDF API PDFCROWD Basel-II benefits SME customers to be treated differently from corporates. Basel-II benefits banks to hold lower capital requirement as having credit card product customers with lower probability of default (Graph 2). Create PDF in your applications with the Pdfcrowd HTML to PDF API PDFCROWD External links [ edit ] http://www.bis.org/publ/bcbsca.htm Basel II: Revised international capital framework (BCBS) http://www.bis.org/publ/bcbs107.htm Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) http://www.bis.org/publ/bcbs118.htm Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision) http://www.bis.org/publ/bcbs128.pdf Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework, Comprehensive Version (BCBS) (June 2006 Revision) http://www.bis.org/publ/bcbs189.pdf Basel III : A global regulatory framework for more resilient banks and banking systems (BCBS) (June 2011 Revision) References [ edit ] 1. ^ Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision) , Paragraph 272 2. ^ Basel III : A global regulatory framework for more resilient banks and banking systems (BCBS) (June 2011 Revision) , Paragraph 102 Create PDF in your applications with the Pdfcrowd HTML to PDF API PDFCROWD 3. ^ Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision) , Paragraph 273 4. ^ Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision) , Paragraph 328 5. ^ Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision) , Paragraph 329 Duffie, Darrell and Kenneth J. Singleton (2003). Credit Risk: Pricing, Measurement, and Management. Princeton University Press. Lando, David (2004). Credit Risk Modeling: Theory and Applications. Princeton University Press. ISBN 978-0-691-08929-4. Categories: Basel II This page was last edited on 25 April 2018, at 14:30 (UTC). Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy. Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a non-profit organization. Privacy policy About Wikipedia Disclaimers Contact Wikipedia Developers Cookie statement Mobile view Create PDF in your applications with the Pdfcrowd HTML to PDF API PDFCROWD.
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