As a result of the current credit crisis, regulators are now giving more weight to emerging risks dealing with boundary issues such as the correlation between Market Risk and Credit Risk. The existing value at risk (VaR) methodology has limitations and does not adequately capture the exposure in banks’ trading books to credit-risk related and often illiquid products.

Incremental Default Risk (IDR) is a new minimum Regulatory Capital charge that is designed to cover risks to trading book assets over a longer time line and incorporates additional risk factors such as liquidity and concentrations.