Credit risk modeling under the IRB approach

Abstract

This paper delves into the intricacies of credit risk modeling within the Internal Ratings-Based (IRB) approach, as defined by the Basel II and Basel III frameworks. It commences with an overview of the IRB approach, emphasizing its significance in determining the capital requirements for credit risk. The paper then explores the core components of the IRB model, namely the Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD). Detailed methodologies for estimating these parameters are discussed, with a focus on empirical techniques and regulatory guidelines.