IRB overview

The Internal Ratings Based (IRB) own funds calculation for capital requirements, allows organisations to use internally developed models to assess the level of unexpected losses and capital appropriate for the risk of their portfolio. This often results in lower capital requirements than that held under Standardised approaches set by the regulator on an industry average basis. The main portfolios to attract capital benefit are Residential Mortgages, Retail SME and Wholesale/Corporate.

Enhanced robustness within areas such as governance and data integrity will improve an organisation’s risk management, enabling greater efficiency, driving sustainable growth in profit and returns.

Although capital benefits should be seen as the main motivator to move to an IRB framework, the additional capabilities developed within analytics and predictive modelling will create additional benefits.

4most can offer a range of experience across the full IRB spectrum for credit risk, from existing IRB organisations, to those considering the potential effects and wishing to undertake impact and feasibility assessments.

We can help you with:

  • Development of Compliant Rating Systems
    - Probability of Default (PD), this includes scorecard development to obtain Point in Time (PiT) PD and the development Through the Cycle or PiT Buffer conversion models
    - Exposure at Default (EAD) and Loss Given Default (LGD) Models, where it is often necessary to develop PiT models initially and then undertake an assessment of downturn adjustments.
  • Assessing and ensuring Compliance with Use Test requirements
    - A key consideration of any complaint IRB framework is the ability to evidence use of IRB models and capital consideration in BAU decision making
    - This should be embedded in a number of areas including Stress Testing, Loss Forecasting, Pricing, Portfolio Reporting and Risk Appetite.
  • Development of robust and appropriate governance and operational frameworks
    - Regulators expect direction and ownership from Executive Management, therefore clear evidence needs to be given of practical oversight through appropriate escalation routes and sufficient training, to ensure full understanding of key issues and potential impacts
    - Robust controls in decision making and key processes are also essential to ensure risks are minimised and controlled.
  • Data analysis and construction
    - Data is a cornerstone of any IRB programme and should be structured to allow consistent and efficient analysis
    - It is essential that regular data quality analysis is undertaken with well documented and understood governance processes, this includes process changes of the storage and use of data.
  • Programme directing and monitoring
    - Ongoing attestation/self-assessment of all models and overall IRB framework is required throughout an application process and on an annual basis once approved
    - The preparation of application packs requires central management to ensure that messages are consistent and understood throughout the organisation. This also helps with the identification of gaps and the development of remediation plans.

For further information on our IRB services, please contact our Technical Director
Chris Warhurst:


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