The BIS issued a paper for consultation on guidelines for computing capital for incremental default risk in the trading book. The paper provides additional guidance on how the general principles may be met and contains both guidance on how supervisors will evaluate internal models and fallback options deemed acceptable by the Committee.
In July 2005, the Basel/IOSCO reached an agreement on “The Application of Basel II to Trading Activities and the Treatment of Double Default Effects“. The incremental default risk charge (IDRC) was incorporated into the trading book capital regime in response to the increasing amount of exposure in banks' trading books to credit-risk related and often illiquid products whose risk is not reflected in bank's value at risk (VaR) model.
To evaluate the quantitative impact of the guidelines on banks' portfolios, the Basel Committee currently is conducting a data collection exercise.
The Committee expects banks to develop their own internal models for calculating a capital charge for incremental default risk in the trading book.
Deadline for consultation is 15 February 2008.
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