IRBlähestymistavassa

IRBlähestymistavassa is a Finnish term that translates to "IRB approach" or "IRB method" in English. It refers to a specific methodology used in risk management, particularly within the financial sector. The term is derived from the Basel Accords, specifically the International Convergence of Capital Measurement and Capital Standards, often abbreviated as Basel II and Basel III. These accords introduced the concept of Internal Ratings-Based (IRB) approaches as a way for banks to calculate their regulatory capital requirements.

The core idea behind the IRB approach is to allow sophisticated banks to use their own internal models and data to estimate the riskiness of their assets, particularly credit risk. Instead of relying on standardized risk weights provided by regulators, banks can develop their own internal rating systems to assess the probability of default (PD) and loss given default (LGD) for their borrowers. These internal estimates are then used to calculate the amount of capital a bank must hold against potential losses.

There are two main types of IRB approaches: the foundation IRB (F-IRB) and the advanced IRB (A-IRB). Under F-IRB, banks use their own estimates for PD but rely on supervisory estimates for LGD and exposure at default (EAD). In contrast, A-IRB allows banks to use their own internal estimates for PD, LGD, and EAD. The A-IRB approach requires more advanced data, modeling capabilities, and stringent supervisory approval. The IRB approach is intended to provide a more accurate reflection of a bank's true risk profile and incentivize better risk management practices. However, it also requires significant investment in data infrastructure, risk modeling expertise, and robust internal controls.