The internal ratings-based (IRB) approach maps banks’ risk profiles more adequately than the standardized approach. After switching to IRB, banks’ risk-weighted asset (RWA) densities are thus expected to diverge, especially across countries with different supervisory strictness and risk...

Some financial institutions can use internally developed credit risk models to determine their capital requirements. At the same time, the regulatory framework governing such models allows institutions to implement diverse rating systems with no specified penalty for poor model performance. To...