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IRC and CRM : Modelling Framework for the ‘Basel 2.5’ Risk Measures
Author(s) -
Wilkens Sascha,
Brunac JeanBaptiste,
Chorniy Vladimir
Publication year - 2013
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2013.12015.x
Subject(s) - basel ii , operational risk , complement (music) , risk adjusted return on capital , basel iii , credit risk , risk weighted asset , capital requirement , economics , econometrics , capital (architecture) , risk management , computer science , business , actuarial science , microeconomics , finance , financial capital , profit (economics) , history , biochemistry , chemistry , phenotype , capital formation , archaeology , complementation , gene , incentive
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.