FRM Part II · FRM Exam Part II · Credit Risk Management
A bank using the foundation internal ratings-based approach estimates a corporate borrower's one-year PD at 2%. Which input is still supplied by the regulator rather than estimated by the bank?
Loss given default is supplied by the regulator under the foundation IRB approach. The bank estimates PD from its own rating system, while supervisory values are used for LGD and exposure at default; only the advanced approach lets banks estimate these.
- ALoss given defaultCorrect
- BProbability of default
- CInternal rating grade
- DObligor's credit score
Explanation
Under foundation IRB, banks estimate PD themselves, while supervisory values are used for LGD and EAD (and generally maturity). Advanced IRB allows the bank to estimate LGD and EAD itself. PD is therefore the bank's own input, not the regulator's.
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