IRB Framework and Risk-rating System

Financial services professionals, consultants, and sales professionals interested in providing or selling products and services to banks and other financial institutions, and everyone interested in knowing about credit and operational risk exposure to banks and capital requirements to cover those risks in the light of Basel II framework


Expected Duration
60 minutes

When banks and other financial institutions offer loans, leases, and other credit related services, counterparty credit risk is arguably the most significant risk that they face. The Basel regulations, specifically Basel II and III, stress the need for a strong risk measurement and supervision framework and recommend banks follow one of two approaches. The first approach, called the standard approach, requires banks to use ratings from external credit rating agencies to determine minimum capital required to cover their credit exposures. In contrast to this simplistic approach, the second approach, called internal-ratings based (IRB) approach, relies on internal risk rating systems developed by the banks themselves. Banks are required to categorize their risk exposures in categories such as corporate, sovereign, bank, retail, and equity. The estimation of key risk components or parameters such as probability of default, loss given default, exposure at default, and maturity is also required.
This course presents a high level view of IRB approaches, rating systems, and related concepts. The course covers the foundation IRB and advanced IRB approaches, and discusses related concepts such as banking-book exposures and risk components. The course also goes on to discuss key components of an IRB system and the rating system design for a bank.


IRB Framework

  • identify the differences between the foundation and advanced IRB approaches
  • recognize characteristics of banking-book exposures
  • identify risk components
  • recognize characteristics of an IRB framework
  • Risk-rating System

  • select components of the IRB system
  • identify elements of rating system design
  • recognize characteristics of a risk-rating system




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