| Basel Framework International regulatory standards for banks |
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| Background |
| Pillar 1: Regulatory capital |
| Pillar 2: Supervisory review |
| Pillar 3: Market disclosure |
| Business and Economics Portal |
The term Foundation IRB or F-IRB is an abbreviation of foundation internal ratings-based approach, and it refers to a set of credit risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions.
Under this approach the banks are allowed to develop their own empirical model to estimate the PD (probability of default) for individual clients or groups of clients. Banks can use this approach only subject to approval from their local regulators.
Under F-IRB banks are required to use regulator's prescribed LGD (Loss Given Default) and other parameters required for calculating the RWA (Risk-Weighted Asset) for non-retail portfolios. For retail exposures banks are required to use their own estimates of the IRB parameters (PD, LGD, CCF). Then total required capital is calculated as a fixed percentage of the estimated RWA.
Reforms to the internal ratings-based approach to credit risk are due to be introduced under the Basel III: Finalising post-crisis reforms.