February 15, 2008
JBA’s Position Regarding "Guidelines for Computing Capital for Incremental
Default Risk in the Trading Book"
Japanese Bankers Association

We, Japanese Bankers Association, would like to express our gratitude for giving us
this opportunity to comment on "Guidelines for Computing Capital for Incremental
Default Risk in the Trading Book" published by the Basel Committee on October 12
last year (the “Guidelines”).
We hope that the comments below will assist the Basel Committee in finalizing theGuidelines.
(General Comments)
We are basically in support of the content of the proposed Guidelines as they attempt
to clarify the content of the Basel II Framework text.
Japan introduced the Basel II Framework at the end of March 2007 and has
endeavored to use it in order to enhance risk management capabilities of banks. Ourunderstanding is that this proposal refers to the Market Risk Amendment covered byBasel II, and more specifically, focuses on the use of internal models for specific risks
within market risks.
We think it is necessary to ensure that the Guidelines clarify the content of the Basel II
text and that the hurdles are not excessively high in light of the practice of tradingbusiness.
(Specific Points) (Comments on specific issues where feedback is sought)
Discussion Point 3: Frequency of calculation of incremental default risk
Currently, when calculation is made using analytical reports from ratings agencies
concerning default rates, etc., the highest updating frequency is once per year. If theintention of the Guidelines is to require calculation on a daily basis, we would like toinsist that there needs to be room for discretion with respect to the frequency ofcomputation of incremental default risk so that it can be aligned with the actualinternal risk management practices of the financial institution.
Discussion Point 5: Estimation of liquidity horizon

１．Clarification of "liquidity considerations"
At the end of Paragraph 20, it is stated that “it is appropriate that default risk capitalcharges for trading book positions reflect these liquidity considerations." But, it is1

extremely difficult to quantitatively measure liquidity for each individual instrument,
and even if multipliers etc. are used, it is impossible to verify the validity of such
multipliers.
We believe that it would be easier for us to understand the Guidelines if, to the extent
possible, specifications or clear instructions with respect to the instrument categories
and their liquidity horizons were provided, which would facilitate early implementationof the Guidelines.

２．Concept of liquidity horizon
In Paragraph 22, reference is made to "The time period consistent with the bank's
actual trading experience and risk management process in rebalancing similar
positions during stressed market conditions." There are, however, limitations to thenumber of samples to be used in estimating liquidity horizon for individual instruments.
Especially, during stressed market conditions, it must be considered extremely difficult
to collect data on liquidity horizons for actual positions in individual instruments. We
would therefore like to request that the Guidelines provide specific liquidity horizons
for individual instruments in case where sample numbers are limited.

３．Measurement of concentrated positions (issuer concentration)
In Paragraph 25, it is stated that “This longer liquidity horizon for concentrated
positions is necessary to provide adequate capital against two types of concentration:issuer concentration and market concentration.” Since we think that “issuerconcentration” has no relation to “liquidity horizon”, we would like to see a clearer
explanation of the relationship between the two in the context of this paragraph.
Discussion Point 6: Estimation methods for incremental default risk ofstructured products
Paragraph 10 discusses "indirect losses that may arise from default events in (equitysecurities and) structured credit assets," which we interpret as losses from default
events for" a part of the assets" included in the structured credit assets. In other words,
it is difficult to conceive of defaults on all of the assets in a structured credit asset, inwhich case it would presumably be treated as a direct loss. In the case of direct loss, it
is likely that there will also be credit migration such as downgrading or fluctuations in
spread risks occurring simultaneously.
However, the Guidelines provide for capital charges for the former (indirect losses
arising from default events) but not for the latter (credit migration or spread risks)(Paragraph 14), making a conceptual distinction between the two. We would like to
see a clearer explanation of the difference between the "indirect losses arising fromdefault events in structured credit assets" discussed in Paragraph 10 and the "credit
migration or spread risks" discussed in Paragraph 14.

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