The Committee also is pressing ahead with our work to introduce a credit default risk charge for the trading book. As you know, there has been a rapid growth of less liquid, credit sensitive products in banks’ trading books. These products include structured credit assets and leveraged lending.
The VAR-based approach is insufficient for these types of exposures and needs to be supplemented with a default risk charge. In addition, it is critical that banks conduct rigorous Pillar 2 stress testing of their trading book exposures. They must factor in liquidity horizons and reflect these results in their risk limits, economic capital and concentration management strategies.