Under Basel II’s advanced IRB approach, the capital required for credit risk can be calculated as follows:

Capital required = PD x LGD x EAD x (1 – R)

where:
PD = Probability of Default = 0.06%
LGD = Loss Given Default = 40%
EAD = Exposure at Default = $100 million
R = Risk-weighted assets = 12.5% (for A-rated corporations under advanced IRB approach)

Therefore, the capital required for credit risk is:

Capital required = 0.0006 x 0.4 x $100 million x (1 – 0.125) = $21,000

Under Basel II’s credit-rating-based standardized approach, the capital required for credit risk is based on a fixed percentage of the exposure at default, depending on the credit rating of the borrower. For A-rated corporations, the risk weight is 20%. Therefore, the capital required for credit risk under the standardized approach is:

Capital required = 20% x $100 million = $20 million

As we can see, the capital required for credit risk under the advanced IRB approach is significantly lower than the capital required under the credit-rating-based standardized approach. This is because the advanced IRB approach allows banks to use their own internal models to estimate the probability of default, loss given default, and exposure at default, which can be more accurate than the fixed percentages used under the standardized approach.