The concept of incremental risk charge is relatively new in the banking sector. I do see some references in the literature but not sure if they are peer-reviewed. Any standard references for implementing IRC, that complies with the regulations will be helpful. Thanks.

First of all, consider the EBA Guidelines on IRC. At the end of the day, IRC is a regulatory exercise, and some academically appealing concepts will not be allowed anyway. For instance, you will not be allowed to generate hypothetical spreads (what will be the spread for a CCC-rated Pfandbrief?) from historical data (PD/LGD) but will be required to somehow use "market data". IMHO,- use some very basic CreditMetrics-type portfolio model- forget about liquidity horizons, use constant position assumption instead (the regulatory requirements on liquidity horizons are particularly challenging) -> a one-period portfolio model will do- try to run the model with few parameters (correlations, migration matrices, LGD, spreads) but invest heavily in their validation- take validation very seriously, and be quite formal (have a validation concept, perform validation according to the concept, document validation results accordingly)

Good to finally see a discussion on IRC. A couple comments & questions:@cm27874 - your suggestion about model validation (and SR 11-7 in general) is excellent.The IRC regulatory requirements from the Fed (e.g. multi-factor model, full revaluation, stochastic recovery, etc.) are much more onerous than those from EBA. I've seen a couple different modeling methodolgies being used - Monte Carlo and variant of recursion being among them. Large US banks have been doing IRC modeling the longest (since 2011, I guess). Can anyone throw any light on how they handle modeling issues like calculation time & convergence (for MC), modeling credit migration (migration matrices or credit spread model), etc.?

Hi,Would anyone like to add any insights? This thread is sinking fast!Thanks in advance.S.

@cm27874 - do the EBA guidelines allow ageing of the portfolio? (e.g. as trades mature). I believe they don't allow rebalancing of hedges. Also, any thoughts on the Fed questions?Thanks vm.