INTM267738 | Foreign banks trading in the UK through permanent establishments: The approach in determining an adjustment to funding costs - STEP 2: Risk weighting the assets - the Basel II regulatory regime: Pillar 1 - internal rating based approaches to credit risk

If Prudential Regulation Authority (PRA) consent is obtained, a bank may use its own internal systems for the management and rating of credit risk exposures instead of The Standardised Approach (TSA). Under an IRB approach, each exposure must be assigned one of the following exposure classes:

1. Claims or contingent claims on central governments and central banks

2. Claims or contingent claims on institutions

3. Claims or contingent claims on corporates

4. Retail claims or contingent retail claims

5. Equity claims

6. Securitisation positions

7. Non-credit obligation assets

Exposure classes covered by IRB approaches are given at BIPRU 4.3.2.

The PRA provides a series of formulae to arrive at the risk weights using risk components. These include probability of default (PD), exposure at default (EAD), maturity and credit conversion factors. The risk weights attached to assets are a function of these variables. Within each exposure class counterparties are classified in bands representing different levels of credit risk based on internal credit ratings.