DEFINITION of 'Advanced Internal Rating-Based - AIRB'

An approach that requests that all risk components be calculated internally within a financial institution. The advanced internal rating-based (AIRB) approach helps an institution reduce its capital requirements and credit risk.

In addition to the basic internal rating-based (IRB) approach estimations, the AIRB approach allows banks to estimate more risk components themselves, such as loss given default (LGD) and exposure at default (EAD). These would normally be estimated by supervisory authorities.

BREAKING DOWN 'Advanced Internal Rating-Based - AIRB'

Implementing the AIRB approach is one step in the process to becoming a Basel II-compliant institution; however, an institution may implement the AIRB approach only if they comply with certain supervisory standards set forth in the Basel II accord.

RELATED TERMS
  1. Exposure At Default - EAD

    A total value that a bank is exposed to at the time of default. ...
  2. Credit Default Contract

    Security with a risk level and pricing based on the risk of credit ...
  3. Basel I

    A set of international banking regulations put forth by the Basel ...
  4. Basel III

    A comprehensive set of reform measures designed to improve the ...
  5. Capital Requirement

    The standardized requirements in place for banks and other depository ...
  6. Credit Exposure

    The total amount of credit extended to a borrower by a lender. ...
Related Articles
  1. Investing

    Using Economic Capital To Determine Risk

    Discover how banks and financial institutions use economic capital to enhance risk management.
  2. Investing

    How Basel 1 Affected Banks

    This 1988 agreement sought to decrease the potential for bankruptcy among major international banks.
  3. Investing

    Understanding The Basel III International Regulations

    The Basel III regulations mark a drastic reform in international banking. But how do they impact the future's investment landscape?
  4. Insights

    Why and When Do Countries Default?

    Countries can default on their debt. This happens when the government is either unable or unwilling to make good on its fiscal promises.
  5. Investing

    How Credit Rating Risk Affects Corporate Bonds

    Credit migration risk is a vital part of the credit risk assessment, specifically with regard to corporate bonds which underlie numerous rating changes.
  6. Investing

    Should You Use DCF for Valuation?

    We explain the two primary valuation techniques—DCF and Comparables—used to predict future stock prices.
  7. Investing

    Institutional Investors And Fundamentals: What's The Link?

    Big-money sponsorship might make a company look good, but it's not always a reliable gauge of stock quality.
  8. Financial Advisor

    Junk Bond

    Find out more about these bonds that have a high risk of default.
  9. Personal Finance

    What Is The Bank For International Settlements?

    Get the scoop on the structure and functions of the oldest global financial institution.
RELATED FAQS
  1. How do you calculate GDP with the income approach?

    Learn how to calculate the gross domestic product (GDP) of a country by using the income approach, which adds together all ... Read Answer >>
  2. In what types of financial situations would credit spread risk be applied instead ...

    Find out when credit risk is realized as spread risk and when it is realized as default risk, and learn why market participants ... Read Answer >>
  3. What percent of capital should banks hold relative to its risk weighted assets?

    Learn what percentage of capital banks must hold under the capital adequacy ratio as set forth in Basel III, and understand ... Read Answer >>
  4. What is the Federal Reserve Board's market risk capital rule?

    Learn about the market risk capital rule enacted by the Federal Reserve, and understand how this rule reflects the Basel ... Read Answer >>
Trading Center