Advanced Internal Rating-Based - AIRB

AAA

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.

INVESTOPEDIA EXPLAINS '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. Basel Committee On Bank Supervision

    A committee established by the central bank governors of the ...
  2. Bank For International Settlements ...

    An international organization fostering the cooperation of central ...
  3. Tier 1 Capital

    A term used to describe the capital adequacy of a bank. Tier ...
  4. Tier 2 Capital

    One of two categories by which a bank's capital is divided. Tier ...
  5. Capital Requirement

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

    The chance that an investment's actual return will be different ...
RELATED FAQS
  1. How does a credit crunch occur?

    A credit crunch occurs when there is a lack of funds available in the credit market, making it difficult for borrowers to ... Read Full Answer >>
  2. What is the haircut rate imposed by clearing corporations?

    A haircut rate is a measure that reduces the value of any collateral used in a loan to ensure that when the effects of volatility ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Looking Deeper Into Capital Allocation

    Discover how companies decide how to spend their cash in a variety of market conditions.
  2. Options & Futures

    What Is Your Risk Tolerance?

    Forget the cliches and uncover how much volatility you can really stand.
  3. Insurance

    Basel II Accord To Guard Against Financial Shocks

    Problems with the original accord became evident during the subprime crisis in 2007.
  4. Personal Finance

    How Basel 1 Affected Banks

    This 1988 agreement sought to decrease the potential for bankruptcy among major international banks.
  5. Personal Finance

    Overdrafting

    An overdraft occurs when money is withdrawn from a bank account in an amount that exceeds the funds available in the account. Banks often permit this as a form of short-term loan to the account ...
  6. Trading Strategies

    Eyeing a Loan? Consider Skipping the Banks

    Peer-to-peer lending platforms, such as Lending Tree, Lending Club and Prosper, offer borrowers newfound leverage. Here's a look.
  7. Personal Finance

    What's a Commercial Bank?

    A commercial bank is a type of financial institution that accepts deposits, offers checking account services, makes business, personal and mortgage loans; and offers basic financial products ...
  8. Personal Finance

    What's a Bank Rec?

    A bank reconciliation statement is a monthly statement from the bank showing all activity in an account during the previous month, along with the end-of-month balance. An individual or company ...
  9. Investing

    What's Investment Banking?

    An investment bank is a special type of bank involved in a variety of large and complex financial services for major institutions.
  10. Economics

    What's the Federal Funds Rate?

    The federal funds rate is the interest rate banks charge each other for overnight loans to meet their reserve requirements.

You May Also Like

Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  3. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  4. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  5. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  6. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
Trading Center