10. IRB Approach: Overview and Asset Class Definitions
No: 44047144
Date(g): 27/12/2022 | Date(h): 4/6/1444
Status: In-Force
10.1
This chapter describes the internal ratings-based (IRB) approach for credit risk. Subject to certain minimum conditions and disclosure requirements, banks that have received SAMA’s approval to use the IRB approach may rely on their own internal estimates of risk components in determining the capital requirement for a given exposure. The risk components include measures of the probability of default (PD), loss given default (LGD), the exposure at default (EAD), and effective maturity (M). In some cases, banks may be required to use a supervisory value as opposed to an internal estimate for one or more of the risk components.
10.2
The IRB approach is based on measures of unexpected losses (UL) and expected losses. The risk-weight functions, as outlined in chapter 11, produce capital requirements for the UL portion. Expected losses are treated separately, as outlined in chapter 15.
10.3
In this chapter, first the asset classes (e.g. corporate exposures and retail exposures) eligible for the IRB approach are defined. Second, there is a description of the risk components to be used by banks by asset class. Third, the requirements are outlined that relate to a bank’s adoption of the IRB approach at the asset class level and the related roll-out requirements. In cases where an IRB treatment is not specified, the risk weight for those other exposures is 100%, except when a 0% risk weight applies under the standardized approach, and the resulting risk-weighted assets are assumed to represent UL only. Moreover, banks must apply the risk weights referenced in paragraphs 7.53, 7.54 and 7.101 of the standardized approach to the exposures referenced in those paragraphs (that is, investments that are assessed against certain materiality thresholds).
