Question

Regulators base the capital they require banks to keep on VaR. For market risk and credit risk, what is the average number of days and confidence level used?

Answer 1

Banks are required to hold a minimum level of capital based on the Value at Risk (VaR) measure, with a standard of 10 days and 99% confidence for market risk, and typically a 1-year and 99.9% confidence for credit risk.

Step-by-step explanation:

Regulators require banks to maintain a minimum level of capital to safeguard against the risks they face, such as market and credit risks. This is monitored through the Value at Risk (VaR) measure, which is a statistical technique used to quantify the risk level over a specific time frame and confidence interval. For market risk, the standard time horizon is 10 days, with a 99% confidence level, meaning the bank must hold enough capital to cover losses that are not exceeded 99% of the time over 10 days. For credit risk, the time horizon can vary, but often a 1-year period is used, commonly with a 99.9% confidence level, indicating that capital should cover potential losses excluding the worst 0.1% of cases.