The new Basel Accord puts forward two methods to deal with credit risk: standard method and internal rating method. Based on Basel Accord 1988, the standard method uses external rating agencies to determine the risk weight, aiming at banks with low complexity. The use of external rating agencies should be said to be more objective and reflect the actual risk level than the original classification method based on OECD countries. However, for the vast number of developing countries including China, to a considerable extent, the objective conditions for applying this law do not exist. There are few domestic rating companies in developing countries, and it is difficult to meet internationally recognized standards; The number of banks and enterprises rated is limited; The rating cost is high, and the results are not necessarily objective and reliable. If the standard method is rigidly applied, the rating of most enterprises will be lower than BBB, and the risk weight will be 100%, or even150% (enterprises below bb-). Enterprises will not be motivated to participate in rating, because the risk weight of unrated enterprises is only 100%. In addition, due to the improvement of risk weight and the introduction of operational risk capital requirements, adopting this method will naturally generally improve the capital level of banks.
Applying IRB to capital supervision is the core content of the New Basel Accord. This method inherits the innovation of 1996 market risk supplementary agreement, and allows the use of its own internal measurement data to determine capital requirements. There are two forms of internal rating method, primary method and advanced method. The first-level method only requires banks to calculate the borrower's default probability, and other risk factors are determined by the regulatory authorities. Advanced rules allow banks to use multiple risk factor values calculated by themselves. In order to promote the use of IRB, the Basel Committee has arranged a three-year transition period for banks adopting IRB since 2004.