Regulatory Alerts2022-05-17
Capital Review - Setting an output floor for the IRB approach
The Financial Stability Office proposes combining an increased Internal Ratings-Based scalar with an output floor to address disparities between IRB and standardized capital outcomes. This dual approach preserves the risk sensitivity of the IRB framework while using the floor as a backstop for outlier banks, avoiding the rigidity of relying solely on a high calibration floor. The strategy ensures that marginal capital requirements remain responsive to underlying risk changes rather than being dictated by the less risk-sensitive standardized approach.
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