Use of Internal Risk Measurement Models to Compute the IRC
CA-14.13.26
As noted above, these guidelines do not prescribe any specific modelling approach for capturing incremental risk. Because a consensus does not yet exist with respect to measuring risk for potentially illiquid trading positions, it is anticipated that banks will develop different IRC modelling approaches.
Added: January 2012CA-14.13.27
The approach that a bank uses to measure the IRC is subject to the "use test". Specifically, the approach must be consistent with the bank's internal risk management methodologies for identifying, measuring, and managing trading risks.
Added: January 2012CA-14.13.28
Ideally, the supervisory principles set forth in this document would be incorporated within a bank's internal models for measuring trading book risks and assigning an internal capital charge to these risks. However, in practice a bank's internal approach for measuring trading book risks may not map directly into the above supervisory principles in terms of capital horizon, constant level of risk, rollover assumptions or other factors. In this case, the bank must demonstrate that the resulting internal capital charge would deliver a charge at least as high as the charge produced by a model that directly applies the supervisory principles.
Added: January 2012
