Laying a solid foundation for the IRB Approach in Turkey

Turkey’s Banking Regulation and Supervision Agency (BDDK) is moving ahead with plans to permit the use of the Internal Ratings-Based (IRB) Approach to credit risk. Having relied on the Standardized Approach for some time, many banks will beeager to reduce their capital requirements by moving to more risk-sensitive IRB models. However, in order to do so, they must address a number of operational challenges.

The IRB Approach includes many more steps than the Standardized Approach. For example, in order to calculate their risk-based capital, banks must first compute their probability of default (PD) and then their risk-weighted assets (RWA). This requires the use of many more models and much more data than the Standardized Approach.

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