FRM Part II · FRM Exam Part II · Credit Risk
A bank using the Basel foundation internal ratings-based (F-IRB) approach for corporate exposures must estimate which risk parameter itself, with the supervisor supplying the others?
Under the foundation IRB approach, the bank estimates only the probability of default from its own rating system. The supervisor prescribes loss given default, exposure at default and typically maturity, which are only estimated internally under the advanced IRB approach.
- AProbability of defaultCorrect
- BLoss given default
- CExposure at default
- DEffective maturity
Explanation
Under F-IRB the bank estimates PD using its internal rating system. Supervisory values are given for LGD, EAD and (generally) maturity. Under advanced IRB the bank also estimates LGD, EAD and maturity.
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