IRC and CRM: Modelling Framework for the ‘Basel 2.5’ Risk Measures

Sascha Wilkens, Jean†Baptiste Brunac and Vladimir Chorniy

European Financial Management, 2013, vol. 19, issue 4, 801-829

Abstract: This paper presents a modelling framework for the Incremental Risk Charge (IRC) and Comprehensive Risk Measure (CRM) as the new capital requirements for market risks in a bank's trading book (‘Basel 2.5’). Both are Value†at†Risk†type measures projecting losses over a one†year capital horizon at a 99.9% confidence level and are applicable to credit flow and credit correlation instruments, respectively. With no consensus on industry standards for suitable internal models as yet, the article discusses selected risk factor models to derive simulation†based loss distributions and the associated risk figures. Example calculations and implementation aspects complement the discussion.

Date: 2013
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