Frontiers of Risk Management, Volume II

CHAPTER 1

The Use of Credit Rating Agencies and Their Impact on the IRB Approach

Markus Krebsz, Gary van Vuuren, and Krishnan Ramadurai

Fitch Ratings

Introduction: The IRB Approach—Cornerstone of Basel II

This chapter was originally drafted when Basel II was new. Basel III in its various manifestations does not make any major change to Basel II in this regard. IFRS 9 requiring a general provision for any facility to be introduced essentially builds upon the IRB framework discussed in this chapter which remains as valid today as it was when originally drafted.

The IRB approach is a cornerstone in the Basel II capital framework and a critical innovation in the regulatory capital treatment of credit risk. Indeed, much of the work of the Committee ...