What is IRB approach in SAP FS-BA-PM-CR - Credit Risk?

SAP Term: IRB approach

• Component: FS-BA-PM-CR

• Component Name: Credit Risk

• Description: Procedure for calculating the capital requirement, as described in the standardized approach for Basel II. The standardized approach permits banks to use their own estimations for ratings IRB foundation approach, the loss given default, and for the credit conversion factor IRB advanced approach. Examples: IRB foundation approach IRB advanced approach

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• Key Concepts: 
  The IRB approach stands for Internal Ratings Based approach and is a method used in the FS-BA-PM-CR Credit Risk Management component of SAP. It is a risk-sensitive approach to credit risk management that allows banks to use their own internal ratings to determine the amount of capital they need to set aside for credit risk. 
  
  How to use it: 
  The IRB approach is used by banks to calculate the amount of capital they need to set aside for credit risk. Banks must first assign internal ratings to their customers based on their creditworthiness. These ratings are then used to calculate the amount of capital that needs to be set aside for each customer. The capital requirement is based on the riskiness of the customer’s credit profile. 
  
  Tips & Tricks: 
  When using the IRB approach, it is important to ensure that the internal ratings assigned to customers are accurate and up-to-date. This will ensure that the capital requirement is accurate and that the bank has enough capital set aside for potential losses. 
  
  Related Information: 
  The IRB approach is part of the Basel II Accord, which sets out international standards for banking regulation. The Basel II Accord also includes other approaches such as the Standardized Approach and the Foundation Internal Ratings Based Approach.