Internal Rating Based (IRB) Approach

Approaches to credit risk under which a financial institution may use internal estimates to generate risk components for use in their credit risk regulatory capital requirements. There are two approaches allowed under the Basel II accord: Foundation (FIRB) and Advanced (AIRB). The internal ratings based (IRB) approach, is a more fundamental shift in capital regulation that allows financial institutions to estimate internally the amount of capital needed to support their unique set of risks. Only financial institutions that demonstrate the ability to conduct the necessary credit risk analysis will meet the eligibility standards for participation in the IRB approach. Financial institutions may choose between the "Foundation" and "Advanced" IRB approaches, which differ in the extent to which financial institutions supply the inputs used in calculating capital.