In July 2009 The Bank of International Settlementsâ (BIS) Basel Committee on Banking Supervision issued revised guidelines for the charging of capital for incremental risk on the trading book. Under the new IRC guidelines, banks are required to hold capital to a one-year time horizon to a confidence level of 99.9%, considerably above the 10 day 99% Value at Risk (VaR) used for day-to-day market risk management purposes.
The implementation of IRC is likely to prompt a significant change in the behavior of European banks. The SunGard/InteDelta survey, which questioned executives directly responsible for IRC modeling at a number of major European banks, found that 64% expected the guidelines would have a significant impact - with IRC being a major disincentive to holding risky credit assets on the trading book. Other findings include:
â¢ 55% of respondents anticipated that the implementation of IRC would lead to a significant increase in capital. Many highlighted certain products whose profitability and even viability may be threatened by the implementation of IRC. These included structured credit, corporate CDOs and correlation trading.
â¢ Only 10% of those surveyed are in the implementation phase for IRC, with 40% still only at planning stage
â¢ While 40% of those surveyed said that they were developing new models to react to the IRC guidelines, all the respondents said that they were incorporating regulatory principles into these models rather than choosing to adopt their own.
For full details of the survey, please click here.
Michael Bryant, managing director at InteDelta, commented: âThis research echoes wider feedback that had been highlighted by the industry to the BIS over its IRC consultation period. While all questioned were supportive of the need for an IRC framework, the executives we interviewed raised many specific concerns regarding the rules. Banks are also struggling with aspects of the implementation such as modelling liquidity and obtaining reliable data.â
Mat Newman, head of product management for SunGardâs Adaptiv risk management solution, commented: âThereâs not much time left for banks to prepare for this new charge so they need to move from planning to implementation soon. Critical in a project such as IRC, where the rules are changing and likely to evolve over time is a flexible analytics framework that can quickly incorporate new thinking and new methodologies. Our customers find that Adaptiv Analytics can provide a practical framework for a measure such as IRC, as it combines both market risk and credit risk capabilities in a single, scalable and flexible architecture.â