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CS Professional · Banking and Insurance - Laws and Practice · Risk Management in Banks and Basel Accords

Ananya Bank's board asks which feature of Basel II allowed it to use its own internal estimates of probability of default to compute credit risk capital, subject to supervisory approval. Which approach is this?

This is the Internal Ratings Based approach. Under Basel II, banks with supervisory approval may use their own estimates of parameters such as probability of default to compute credit risk capital. The Standardised approach instead relies on external ratings, and the Basic Indicator Approach applies to operational risk.

  1. AInternal Ratings Based approachCorrect
  2. BStandardised approach using external ratings
  3. CBasic Indicator Approach
  4. DStandardised Measurement Approach for operational risk

Explanation

Under Basel II, the Internal Ratings Based (IRB) approach lets approved banks use internal estimates such as probability of default to compute credit risk capital. The Standardised approach uses external agency ratings for risk weights. The Basic Indicator Approach concerns operational risk, not credit risk.

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