Targeted Review of Internal Models: What to expect?

Targeted Review of Internal Models: What to expect?

Following the financial crisis of 2007-2009 doubts had emerged on the relevance of the internal models to calculate Risk-Weighted Assets (RWA). The minimum capital required to absorb losses corresponds to a percentage of the RWA. To calculate the RWA, different type of risks (credit risk, market risk and operational risk) are taken into account and each asset class has different risk weights associated with them. As we can see in the scheme below, to calculate these risk weights, banks have the choice between the internal models or the standardized models.

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