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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 the internal models approach computes capital for market risk using a 10-day 99% VaR. The bank's 10-day 99% VaR today is USD 20 million, its average 10-day VaR over the previous 60 business days is USD 18 million, and the multiplication factor is 3.4 (the 1996 base multiplier of 3 plus a plus-factor of 0.4 from backtesting exceptions). Ignoring specific risk, what is the general market risk capital charge?

The charge is the greater of yesterday's VaR and the multiplier times the 60-day average VaR. With 3.4 times USD 18 million equal to USD 61.2 million, which exceeds USD 20 million, the capital charge is USD 61.2 million.

  1. AUSD 60.0 million
  2. BUSD 61.2 million
  3. CUSD 68.0 millionCorrect
  4. DUSD 54.0 million

Explanation

The charge is the higher of the previous day's VaR and the multiplier times the 60-day average VaR. 3.4 x 18 = 61.2, and today's VaR is 20, so the larger is 61.2... however with multiplier 3.4 applied to the 18 average, the result is 61.2 million. Correcting: option 2 (USD 61.2 million) is the true result.

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