We appreciate helpful input and suggestions from Fakher Ben Atig, Maria Teresa Cardoso, Laurent Carlier, Peter Dobranszky, Andrei Greenberg, Tom Hanney, Vera Minina, Sébastien Rérolle, Anton Simanenka and an anonymous referee. The views expressed in this paper are those of the authors and do not necessarily reflect the views and policies of BNP Paribas. Correspondence: Sascha Wilkens.
IRC and CRM: Modelling Framework for the ‘Basel 2.5’ Risk Measures
Article first published online: 29 MAY 2013
© 2013 John Wiley & Sons Ltd
European Financial Management
Volume 19, Issue 4, pages 801–829, September 2013
How to Cite
Wilkens, S., Brunac, J.-B. and Chorniy, V. (2013), IRC and CRM: Modelling Framework for the ‘Basel 2.5’ Risk Measures. European Financial Management, 19: 801–829. doi: 10.1111/j.1468-036X.2013.12015.x
- Issue published online: 6 SEP 2013
- Article first published online: 29 MAY 2013
- incremental risk;
- comprehensive risk;
- basel 2.5
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.