The difference in one line
The standardised approach asks the supervisor for a weight. The IRB approach asks the bank's model for a probability of default and a loss given default, then puts those through a formula. Everything else follows from that.
Side by side
| Feature | Standardised | IRB |
|---|---|---|
| Risk weight source | Prescribed by class and rating | Formula using internal PD and LGD |
| Data requirement | Exposure and rating | Default history, recovery data, validation |
| Maturity | Not an input | Input for corporates |
| Collateral | Affects the weight through prescribed rules | Affects LGD |
| Supervisory approval | Not required | Model permission required |
| Sensitivity to risk | Coarse | High |
Same exposure, two answers
A corporate borrower with no external rating, exposure 10,000,000, PD 1%, LGD 40%, maturity 2.5 years.
- Standardised, CRR: risk weight 100%, RWA 10,000,000, capital 800,000.
- IRB, CRR3: risk weight 82.06%, RWA 8,205,940, capital 656,475.
The IRB approach saves about 18% of the capital for this borrower. For a low-risk corporate with PD 0.1%, the gap is far larger. For a weak borrower with PD 10%, IRB can be more expensive than the standardised weight, which is the point: the model is supposed to discriminate.
Where IRB pays and where it does not
- Pays: large, diversified, low-default portfolios such as prime mortgages, high-quality corporates and card portfolios with long histories.
- Does not pay: small portfolios where data is thin, high-default segments, and exposures that the standardised approach already weights cheaply.
- Costs: model development, validation, supervisory approval and ongoing monitoring. A bank needs scale before the capital saving covers the running cost.
The output floor
Since 2025 the benefit of IRB is capped. Total risk-weighted assets cannot fall below 50% of the standardised result, rising to 72.5% by 2030. A bank whose models produce a very low number still has to hold capital against the floor. The comparison above is a single exposure; the floor works on the whole institution.
Which one should you use
For a single-exposure estimate, use whichever approach the bank actually has permission for. Mixing them in one number produces a figure that no supervisor would recognise. If the question is academic, calculate both and read the difference as the value of the model.
Questions
Can a bank use both approaches?
Yes, with supervisory permission. The permanent partial use rules decide which portfolios stay standardised.
Is IRB always cheaper?
No. For high-default exposures the modelled weight can exceed the standardised one.
Does the standardised approach use maturity?
No. Maturity is an IRB input for corporate exposures.