Skip to content

FRM Part II · FRM Exam Part II · Validating Bank Holding Companies' Value-at-Risk Models for Market Risk

Under the Basel traffic-light approach for a 99% one-day VaR backtest over 250 days, a bank records 7 exceptions. In which zone does the bank fall, and what is the consequence?

Seven exceptions over 250 days falls in the yellow zone, which spans 5 to 9 exceptions. In this zone the supervisory plus-factor added to the capital multiplier rises, increasing market risk capital, though the model is not automatically rejected.

  1. AGreen zone, with no increase in the multiplier
  2. BYellow zone, with an increased capital multiplierCorrect
  3. CRed zone, with automatic model rejection
  4. DYellow zone, with no change to the multiplier

Explanation

Green covers 0 to 4 exceptions, yellow 5 to 9, and red 10 or more. Seven exceptions is in the yellow zone, where the supervisory multiplier add-on increases (0.65 for 7). The red zone is reserved for 10 or more.

Did you get it right without looking?

One question tells you little. A timed set on Validating Bank Holding Companies' Value-at-Risk Models for Market Risk shows your real accuracy, how long you take and where you lose marks.

Practise Validating Bank Holding Companies' Value-at-Risk Models for Market RiskFree diagnostic mock

More Validating Bank Holding Companies' Value-at-Risk Models for Market Risk questions