March 2002
Intermediate to advanced
176 pages
3h 48m
English
book
Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition
by Jean Dermine, Youssef F. Bissada
Content preview from Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition
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The internal ratings-based (IRB) approach
Just as car dealers allow you to buy differently priced cars, the BCBS makes an additional distinction between the foundation and the advanced IRB approaches. Since the key insights can be discussed with the foundation IRB approach, we shall focus on this one. Later, we shall indicate the benefits of using the advanced approach.
In the IRB approach, banks have to calculate the probability (likelihood) of default of a corporate client over a one-year horizon. That is, lending today to a client, what is the probability of default of the borrower in one year’s time? This probability of default is referred to as the PD. In the case of retail loans, a similar probability of default can be calculated for a ...
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