Basel 2.5 - Incremental Risk Charge : Math and more

After Lehman crisis, since 2009, new capital requirements (Basel Committee on Banking Supervision) have complemented already existing risk indicators, to better align capital charges to the risk the banking system has been gaining exposure to.
IRC (Incremental Risk Charge) is, under the trading book regime, an estimate of default and rating migration risk, relative to unsecuritised credit products, over a one-year capital horizon, at a 99.9% percent confidence level .
We will analyze this risk indicator and we will describe the (challenging) iter a bank follows to obtain, starting from regulatory guidelines, a mathematical model that does the necessary job and makes everybody happy .