Skip to content

FRM Part II · FRM Exam Part II · Range of Practices and Issues in Economic Capital Frameworks

A bank's economic capital framework (BIS range-of-practices report) must express capital for credit, market and operational risk on a common basis. Which pairing of confidence level and time horizon is most typical of how large banks calibrate economic capital to their target credit rating?

Large banks usually set economic capital at a confidence level of about 99.9% or higher over a one-year horizon, because this reflects the solvency standard consistent with their target credit rating. Short horizons and lower confidence levels are used for trading limits, not capital.

  1. AA 95% confidence level with a one-day horizon
  2. BA confidence level of 99.9% or higher with a one-year horizonCorrect
  3. CA 90% confidence level with a ten-day horizon
  4. DA 99% confidence level with a one-quarter horizon

Explanation

Banks typically calibrate economic capital to the solvency standard implied by their target rating, giving very high confidence levels (around 99.9% or more) over a one-year horizon. Short horizons and low confidence levels such as 95% one-day or 99% ten-day are trading limit or regulatory market risk measures, not capital solvency standards.

Did you get it right without looking?

One question tells you little. A timed set on Range of Practices and Issues in Economic Capital Frameworks shows your real accuracy, how long you take and where you lose marks.

Practise Range of Practices and Issues in Economic Capital FrameworksFree diagnostic mock

More Range of Practices and Issues in Economic Capital Frameworks questions