Wide Variance in Banks' Preparedness for Incremental Risk Charge, Finds Survey

According to a new survey sponsored by SunGard and conducted by InteDelta, a risk management consultancy, there is a wide variation in European banks’ preparedness for the implementation of incremental risk charge (IRC).

In July 2009 The Bank of International Settlements’ (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 behaviour of European banks. The SunGard/InteDelta survey, which questioned executives directly responsible for IRC modelling 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:

• 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 collateralised debt obligations (CDOs) and correlation trading.
• Only 10% of those surveyed are in the implementation phase for IRC, with 40% still only at planning stage.
• 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.

Michael Bryant, managing director at InteDelta, said: “This 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.”

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