Incremental Risk Charge
Posted: 8 September 2011
A survey of banks’ preparedness
This survey conducted by InteDelta and sponsored by SunGard investigates bank’s preparations for Incremental Risk Charge (IRC).
Incremental Risk Charge (IRC) traces its roots back to 2005 when the Basel Committee first considered the need for a new requirement for banks to model and hold capital against risk for credit risky assets held under the banks’ value-at-risk (VaR) framework.
The first guidelines for Incremental Default Risk (IDRC) were issued for comment in October 2007. At this point the proposal was to model defaults but not rating transitions. At its meeting in March 2008, the Committee decided to expand the scope to include transitions. This decision was taken in light of the prevailing credit market turmoil in which many institutions had sustained major losses which were not captured in their 10 day 99% VaR but which were due to credit migrations and the widening of spreads. The final BIS guidelines were issued in July 2009.