Advanced Internal Rating-Based - AIRB

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.