Question 15.15: Explain the difference between the standardized approach, th...

Explain the difference between the standardized approach, the IRB approach, and the Advanced IRB approach for calculating credit risk capital under Basel II.

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The standardized approach uses external ratings to determine capital requirements (but in a more sophisticated way than in Basel I). In the IRB approach, the Basel II correlation model is used with PD being determined by the bank. In the advanced IRB approach, the Basel II correlation model is used with PD, LGD, EAD, and M being determined by the bank.

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