Soundness Standard Comparable to IRB
CA-14.13.5
One of the underlying objectives of the IRB is to achieve broad consistency between capital charges for similar positions (adjusted for illiquidity) held in the banking and trading books. Since the Framework reflects a 99.9 percent soundness standard over a one-year capital horizon, the IRC is also described in these terms.
Added: January 2012CA-14.13.6
Specifically, for all IRC-covered positions, a bank's IRC model must measure losses due to default and migration at the 99.9 percent confidence interval over a capital horizon of one year, taking into account the liquidity horizons applicable to individual trading positions or sets of positions. Losses caused by broader market-wide events affecting multiple issues/issuers are encompassed by this definition.
Added: January 2012CA-14.13.7
As described immediately below, for each IRC-covered position the model must also capture the impact of rebalancing positions at the end of their liquidity horizons so as to achieve a constant level of risk over a one-year capital horizon. The model may incorporate correlation effects among the modeled risk factors, subject to validation standards set forth in Section III. The trading portfolio's IRC equals the IRC model's estimate of losses at the 99.9 percent confidence level.
Added: January 2012
