An increasing number of banks and building societies aim to achieve ‘internal ratings-based (IRB) capital status over the next few years.
With new banks emerging at a faster rate than ever, securing IRB status enables organisations to optimise their capital and gain a competitive advantage in a growing market.
What does IRB status mean?
Being awarded IRB status confirms a bank has sophisticated risk management capability when it comes to calculating capital requirements.
Lenders need to set aside capital to cover unexpected losses arising from defaults on loans and other credit facilities, to ensure their ongoing solvency in the event of a banking crash or similar event.
Under the standardised approach, prescribed risk weights are assigned based on exposure characteristics to inform the capital calculations. However, the Internal Ratings Based (IRB) approach allows lenders to derive their own risk weights, by developing probability of default (PD), loss given default (LGD), and exposure at default (EAD) models, which reflect internal expectations of the portfolio.
This realises several material gains: capital efficiencies, cost savings, strengthened data management and governance processes, improved modelling and MI. There is also an increased awareness of the risk inherent within the portfolio, driving better decisions on future lending to ensure the portfolio is aligned to the business risk appetite.
But complying with the IRB credit risk approach needs significant internal resources and a willingness to tackle an extremely complex project.
That’s why lenders often use our vast experience in this area.
Support to achieve advanced IRB status
Our flexible consultation approach has helped many lenders develop and validate IRB models that meet the Prudential Regulation Authority (PRA) and European Banking Authority (EBA) regulatory requirements.
We have supported clients through the IRB application process and use test assessment to ensure they can evidence that they meet the standards required to be granted IRB status.
We can support the development of your risk framework, aid your understanding and measurement of risk appetite, improve your policy and control frameworks, and advise you on restructuring your operating model and governance processes.
Download our IRB guide
To learn more and get detailed tips and advice on IRB best practice, click to download our IRB guide – or read our latest case study to see how we helped Paragon Bank with its IRB programme.