The use of the proposed IRB approach, in turn, is keyed to the bank's ability to meet minimum supervisory requirements that demonstrate the rigor of its assessment. Reliance on banks' internal credit risk-measurement and -management methodologies is perhaps the single most far-reaching innovation in the new proposal.
Under the IRB approach, a bank would need to have several core inputs for each credit facility: the probability of default (PD) for borrowers assigned to each internal borrower grade; the expected loss rate, given a default (LGD), appropriate to each type of exposure; the expected amount of exposure at default (EAD) for each type of exposure, reflecting any undrawn credit lines; and the maturity of the exposure.