This option is designed for those banks able to estimate default probabilities, but not yet able to determine losses given default or exposures at default. In such cases, estimates of loss given default and the effective amount of exposure would be determined using formulas set by the regulator, and most transactions would have an assumed maturity of three years.
If a bank finds these regulatory parameters too restrictive – and they will be conservative – it may develop its own evidence, use it, and convince the supervisor of its accuracy, after which the bank could move to the advanced approach.