THE MANAGEMENT OF CREDIT RISK ACCORDING TO INTERNAL RATINGS- BASED APPROACH

Abstract

The internal ratings based approach (IRB Approach) was created as part of Basel II replacing the original Basle Accord of 1988 (Basle I) in an effort to create a better framework for regulating bank capital. This paper covers the methodology and components of the IRB Approach used to determine capital requirements for credit risk. Such an approach, which relies heavily upon a banks internal assessment of its counterparties and exposures, can secure two key objectives consistent with those which support the wider review of The New Basel Capital Accord.. IRB approach should promote safety and soundness in the financial system and, consistent with providing incentive compatibility, that the structure and requirements of the IRB approach do not impinge upon or undermine banks well-established lending and credit risk management practices

Keywords

• Basel II
• credit risk
• internal rating based approach