The Bank for International Settlements has published for comment guidelines for computing capital to account for incremental default risk in a bank’s trading book.

The BIS notes that the Basel/IOSCO Agreement reached in July 2005 contained several improvements to the capital regime for trading book positions, including a new requirement for banks that model specific risk to measure and hold capital against default risk that is incremental to any default risk captured in the bank’s value at risk model.

The Basel Committee set up the Accord Implementation Group on the Trading Book primarily to provide further clarification, as well as to provide a forum for supervisors to share their experience in overseeing banks’ implementation of the trading book capital regime. “As there is no clear industry standard for measuring incremental default risk for the trading book, the AIGTB has worked closely with industry groups in developing principles for implementing the new charge that build off the principles in banks’ internal approaches,” it says.

The committee expects banks to develop their own internal models for calculating a capital charge for incremental default risk in the trading book. The paper published today provides additional guidance on how the general principles may be met, and contains both guidance on how supervisors will evaluate internal models and fallback options it deems acceptable.

It welcomes comments on the consultative paper by February 15, 2008.