Purpose – The purpose of this paper is to investigate the relationship between liquidity and credit risk, and employ the findings to estimate the Incremental Risk Charge (IRC), the new credit risk capital add-on introduced by the Basel Committee for banks' trading books. The IRC estimates are...

Purpose – The purpose of this paper is to investigate the relationship between liquidity and credit risk, and employ the findings to estimate the Incremental Risk Charge (IRC), the new credit risk capital add‐on introduced by the Basel Committee for banks' trading books. The IRC estimates...