The Basel Committee on Banking Supervision (BCBS) has issued a consultative document on changes to the advanced internal ratings based approach (A-IRB) and the foundation internal ratings based approach (F-IRB).

The IRB approaches permit banks to use internal models as inputs for determining their regulatory capital requirements for credit risk, subject to certain constraints. The proposed changes to the IRB approaches are a key element of the regulatory reform programme that the BCBS has committed to finalise by the end of 2016.

The proposed changes to the IRB approaches set out in this consultative document include a number of complementary measures that aim to: (i) reduce the complexity of the regulatory framework and improve comparability; and (ii) address excessive variability in the capital requirements for credit risk. Specifically, the BCBS proposes to:

  • remove the option to use the IRB approaches for certain exposures, where it is judged that the model parameters cannot be estimated sufficiently reliably for regulatory capital purposes;
  • adopt exposure-level, model-parameter floors to ensure a minimum level of conservatism for portfolios where the IRB approaches remain available; and
  • provide greater specification of parameter estimation practices to reduce variability in risk-weighted assets for portfolios where the IRB approaches remain available.

The deadline for comments is 24 June 2016.

View BCBS consults on proposed measures to reduce variation in credit risk-weighted assets, 24 March 2016