IRB = Internal Ratings-Based Approach

The IRB approach is a methodology used by banks to calculate regulatory capital requirements for credit risk under the Basel II and Basel III frameworks. Instead of relying on standardized risk weights set by regulators, banks using the IRB approach estimate key risk parameters - Probability of Default (PD), Loss Given Default (LGD), Exposure at Default (EAD), and Maturity (M) - based on their own historical data and internal risk models.