Module: General Practice
Q110: With reference to the Internal Rating Based (IRB) approach for calculating capital requirements under Basel III, consider the following statements:
In the Foundation IRB (F-IRB) approach, banks estimate their own Probability of Default (PD).
In the Advanced IRB (A-IRB) approach, banks estimate PD, Loss Given Default (LGD), and Exposure at Default (EAD).
RBI has made it mandatory for all cooperative banks to adopt the Advanced IRB approach immediately.
Which of the statements given above are correct?
In the Advanced IRB (A-IRB) approach, banks estimate PD, Loss Given Default (LGD), and Exposure at Default (EAD).
RBI has made it mandatory for all cooperative banks to adopt the Advanced IRB approach immediately.
Which of the statements given above are correct?
✅ Correct Answer: A
Statement 1 is correct; under F-IRB (Foundation), banks calculate their own Probability of Default (PD), but they must use regulator-prescribed values for LGD and EAD.
Statement 2 is correct; under A-IRB (Advanced), banks use their own internal models to estimate all three risk components: PD, LGD, and EAD.
Statement 3 is incorrect; RBI has not mandated A-IRB for cooperative banks.
Most cooperative banks follow the simpler "Standardized Approach." A-IRB is complex and typically reserved for large, sophisticated commercial banks with RBI approval.
Statement 2 is correct; under A-IRB (Advanced), banks use their own internal models to estimate all three risk components: PD, LGD, and EAD.
Statement 3 is incorrect; RBI has not mandated A-IRB for cooperative banks.
Most cooperative banks follow the simpler "Standardized Approach." A-IRB is complex and typically reserved for large, sophisticated commercial banks with RBI approval.