Basel II Advanced Internal Ratings Based

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The Basel Accord can havetwo approaches either the Foundation or Advanced approach to using Internal Ratings for Regulatory calculations.

Although many firms will commence Basel II by using the Foundation approach many intend to move to the Advanced approach therefore data to satisfy both approaches has to be defined.

Basel stipulates additional Public Disclosure reporting that define the extent and nature of the firms Credit Risk and provide details of the firms credit risk processes. The IRB Advanced Approach is a significantly refined approach to calculating Credit Risks.The key refinements to the Foundation Approach calculation are:

A firm will use its own internal estimates of EAD and LGD together with the treatment of Guarantees and Credit Derivatives, rather than the parameterised method under the Foundation approach;

Effective Maturity is used in addition to EAD, PD, and LGD in calculating Regulatory Capital (in order to more accurately reflect the impact of transaction maturity on default risk).

Historic data will be maintained and compared to actual EAD, LGD etc in order to validate and refine the calculations.

Firms usually willintend to use the Advanced Approach for Corporate exposures as soon as possible after the Basel II Implementation date (and may decide to use the Advanced approach immediately for Specialised Lending).As a result, data will be calculated and captured using both the Foundation and Advanced Approach for each exposure.Although the inputs to the Advanced Approach differ from the Foundation Approach, the same models for GAE, EAD, PD and LGD wil lcommonly be used.

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