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FRM Part II · FRM Exam Part II · Credit Value at Risk

A bank's one-year credit loss distribution has a mean (expected loss) of USD 40 million. The 99.9th percentile of the loss distribution is USD 340 million. Using the standard definitions, what is the unexpected loss measure (credit VaR relative to the mean) and what is it typically used to set?

The unexpected loss is USD 300 million, the 99.9th percentile loss of 340 million minus the expected loss of 40 million. Expected loss is covered by pricing and provisions, while this unexpected amount is what economic capital is held against.

  1. AUSD 300 million; economic capitalCorrect
  2. BUSD 340 million; loan loss provisions
  3. CUSD 380 million; economic capital
  4. DUSD 300 million; loan loss provisions

Explanation

Credit VaR measured relative to the mean is 340 - 40 = 300 million. Expected loss is covered by pricing and provisions, whereas the unexpected loss beyond it is covered by economic capital. Adding the mean (380) is a sign error.

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