Which of the following statements is incorrect about the foundation IRB and the advanced IRB approaches for credit risk capital charge in the Basel II Accord?
A. Under the advanced IRB approach, banks are allowed to use their own estimates of PD, LGD, EAD, and correlation coefficient, within the risk-weight functions provided by the supervisors.
B. Under the foundation IRB approach, banks provide their own estimates of PD and rely on supervisory estimates for other risk components.
C. Banks adopting the advanced IRB approach are expected to continue to employ this approach. A voluntary return to the standardized approach is permitted
D. Under both foundation IRB and advanced IRB approaches, the expected loss is not included in the credit risk capital charge.
Answer:A
Under the advanced IRB approach, banks are allowed to provide their own estimate of PD, LGD, and EAD, but must use the correlation coefficient formula specified by the supervisor.
 
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