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.

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

In 4most’s view, whilst capital efficiency is the most apparent tangible benefit of adopting IRB, it is important to understand that it is a result of a considered and robust implementation enabling better risk management, rather than model development in isolation. The effective introduction of IRB allows organisations to make more considered decisions about the overall level of risk versus appetite and therefore lower the risk of the portfolio over time, whilst still making good returns. This is also the view of the PRA and is increasingly becoming a key area of the permission reviews it undertakes. It is therefore critical that any IRB project has multiple streams considering:

  • Model development

  • Robust governance frameworks

  • Advanced risk management across the organisation, including portfolio understanding and emerging risk identification

  • IRB embedding across all functions

  • Comprehensive documentation with clear end to end model detail, identified weaknesses with relevant measures of conservatism and an ability to replicate (and in future, iteratively improve) the model build

  • Senior management understanding and engagement.

4most are well placed to support you on your IRB journey having been involved in IRB related activity in 10+ UK banks & building societies over the last six years with 85% of our  consultants having been directly involved in IRB modelling, forecasting, stress testing, monitoring and reporting. 4most have also supported multiple organisations with their regulatory engagements regarding permission applications and model remediation/validation activity and would pass on the experience gained as part of any engagement. 

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 of 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, underpinned by well documented processes, governance and change control.

  • 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.

  • Provide validation services to assess model and process compliance – click here for more information regarding validation services.


For further information on our IRB services and case studies of previous projects, please contact our Technical Director
Chris Warhurst:


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