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FRM Part II · FRM Exam Part II · Capital Regulation Before the Global Financial Crisis

Under the 1996 Market Risk Amendment to Basel I, a bank using its internal models approach computes the market risk capital charge using which of the following?

The internal models charge uses 10-day, 99% VaR. Capital is the higher of the prior day's VaR and a multiplier, at least 3, times the 60-day average VaR, plus a specific risk charge where needed. The multiplier rises with backtesting exceptions.

  1. AThe 1-day 95% VaR multiplied by a fixed factor of 1
  2. BThe 10-day 99% VaR, with a multiplier of at least 3 applied to the average of recent daily VaRs (or the latest VaR if higher), plus a specific risk chargeCorrect
  3. CThe 1-year 99.9% VaR with no multiplier
  4. DThe 10-day 99% VaR multiplied by the bank's risk-weighted assets

Explanation

The Amendment required 10-day, 99% VaR; the charge is the higher of the previous day's VaR and the multiplier (minimum 3) times the average VaR over the last 60 business days, plus a specific risk charge where the model does not capture it. The 1-year 99.9% VaR is the Basel II credit approach, not this.

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