Measuring and managing market, credit and Op risk [36]

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Bullet points include: Under Basel II, banks can use own internal VaR models to calculate regulatory capital for trading books Capital requirements increase if, over a 250-day period their VaR models under-predict number of losses that exceed 1% quantile Green zone: 0 – 4 exceptions Yellow zone: 5 – 9 exceptions Red zone: 10 or more exceptions Cut-offs can be developed using log likelihood arguments, see Appendix C

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