INTM267739 - Foreign banks trading in the UK through permanent establishments: The approach in determining an adjustment to funding costs - STEP 2: Risk weighting the assets - the Basel II regulatory regime: types of internal rating based approaches to credit risk

There are two IRB approaches: the Foundation IRB and the Advanced IRB. A bank requires Prudential Regulation Authority (PRA) permission to use an IRB approach.

A bank may combine use of The Standardised Approach (TSA) with its IRB approach where the number of material counterparties is limited and it would be unduly burdensome for it to implement a rating system for these counterparties.

Foundation IRB Approach

Under the Foundation IRB approach the bank provides its own estimation of Probability of Default (PD) for exposures in the sovereign and corporate exposure classes.

Advanced IRB Approach

Under the Advanced IRB approach the bank additionally provides its own estimates of Loss Given Default (LGD) and credit conversion factors.

IRB and retail exposures

For retail exposures the bank provides its own estimation of probability of default, LGD, and credit conversion factors.