Credit Risk: AIRB Bank returns to Std Bank - - - - Allowed????

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Dear David and all,

Ref: Past Year Question 2006,

My understanding is that Bank are encouraged to progress from simple bank (that uses Std approach) to Advanced Bank (that uses FIRB or AIRB approach). There should be no turning back in this journey.

But, the following option of the question is correct.

"Banks adopting the advanced IRB approach are expected to continue to employ this approach. A voluntary return to standardized approach is permitted".

Is it true that a voluntary return to standardised approach is allowed? Your advise, please

Regards
Learning

 

[David Harper CFA FRM]

Hi Learning,

I think that language is imprecise. Here is Basel paragraph 261:

"261. Banks adopting an IRB approach are expected to continue to employ an IRB approach. A voluntary return to the standardised or foundation approach is permitted only in extraordinary circumstances, such as divestiture of a large fraction of the bank’s credit-related business, and must be approved by the supervisor."

David