Under the standardized approach, the jump-to-default (JTD) amount, the loss if the obligor defaults, is netted between long and short positions for each obligor, then multiplied by a risk weight based on the credit risk category1. The net exposure to each obligor is calculated conservatively, taking into account a coefficient that limits the hedge benefit2. Under the internal models approach, a DRC model that uses default simulation calculates a credit value at risk at a one-tailed 99.9% confidence level over a one-year holding period (60 days is allowed for equity portfolios), every week3.

The term in Japan's notice is "market risk equivalent amount for default risk." It covers only the default risk of the trading book, separately from credit risk capital.

Notes

  1. "銀行法第十四条の二の規定に基づき、銀行がその保有する資産等に照らし自己資本の充実の状況が適当であるかどうかを判断するための基準" (Standards for determining whether a bank's capital adequacy is appropriate in light of the assets it holds, under Article 14-2 of the Banking Act, our translation; Financial Services Agency Notice No. 19 of 2006, full text updated by the FSA on August 24, 2026) (in Japanese), Article 288, page 524. ↩

  2. Financial Services Agency and Bank of Japan, "「マーケット・リスクの最低所要自己資本」の概要" (Overview of "Minimum capital requirements for market risk", our translation) (January 2019), page 3 (PDF page 4), the default risk item in the overview of the standardized approach (in Japanese). ↩

  3. The same notice, Article 277, paragraph 3, items 1 and 5, page 474. ↩