Final answer:
The drawback of VaR during the financial crisis was its underestimation of potential losses in mortgage-backed securities, contributing to the failure of numerous banks.
Step-by-step explanation:
The drawback of Value at Risk (VaR) during the financial crisis was that it significantly underestimated the potential for large-scale losses in banks' mortgage-backed securities portfolios. VaR was utilized by many financial institutions to gauge the risk of loss on their investments, but it was not calibrated to accommodate the unprecedented scale of the housing market collapse that began in 2007. This miscalculation led to a vast discrepancy between expected and actual losses, resulting in severe financial distress for many banks. During the financial crisis, 318 banks failed in the United States from 2008 to 2011, illustrating the shortfall in the risk models that were used, including VaR.