A small town in Switzerland, part 1

First the simple part. The new revisions to the Basel capital accord include Incremental Risk in the Trading Book. I have already commented on these proposals before, and there is nothing really new in the final version. In particular, there is still no clarity over what specific risk might be for, exactly, if you have incremental risk charges as well. My inference is that the IRC proposals are for those who are using a VAR modelling approach, and that the ordinary specific risk haircuts apply to everyone else. But (so far as I can see) the modellers have to calculate both a specific risk VAR and the IRC.

[My interpretation of the scope of the IRC is based on the following text from BCBS159: 'the IRC encompasses all positions subject to a capital charge for specific interest rate risk according to the internal models approach to specific market risk but not subject to the treatment outlined in paragraphs 712(iii) to 712(vii) of the Basel II Framework', 712(iii) to (vii) being the standard rules approaches for specific risk. Caveat lector.]