Question 15.18: Suppose that the assets of a bank consist of $200 million of...

Risk Management and Financial Institutions

Section 12.10 discusses how statistics can be used to accept or reject a VaR model. Section 15.6 discusses guidelines for bank supervisors in setting the VaR multiplier $m_c$ . It explains that, if the number of exceptions in 250 trials is five or more, then $m_c$ is increased. What is the chance of five or more exceptions if the VaR model is working well?

The blue check mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.

Related Answered Questions

Question: 15.5

A four-year interest rate swap currently has a negative value to a financial institution. Is the financial institution exposed to credit risk on the transaction? Explain your answer. How would the capital requirement be calculated under Basel I? ...

Verified Answer:

There is some exposure. If the counterparty defaul...

Question: 15.13

Equation (15.9) gives the formula for the capital required under Basel II. It involves four terms being multiplied together. Explain each of these terms. ...

Verified Answer:

EAD is the estimated exposure at default. LGD is t...

Question: 15.17

Suppose that the assets of a bank consist of $200 million of retail loans (not mortgages). The PD is 1% and the LGD is 70%. What are the risk-weighted assets under the Basel II IRB approach? What are the Tier 1 and Tier 2 capital requirements? ...

Verified Answer:

In this case, ρ = 0.1216, WCDR = 0.0914, and the c...

Question: 15.16

Explain the difference between the basic indicator approach, the standardized approach, and the advanced measurement approach for calculating operational risk capital under Basel II. ...

Verified Answer:

In the basic indicator approach, total capital is ...

Question: 15.15

Explain the difference between the standardized approach, the IRB approach, and the Advanced IRB approach for calculating credit risk capital under Basel II. ...

Verified Answer:

The standardized approach uses external ratings to...

Question: 15.14

Explain the difference between the simple and the comprehensive approach for adjusting capital requirements for collateral. ...

Verified Answer:

Under the simple approach, the risk weight of the ...

Question: 15.2

“The existence of deposit insurance makes it particularly important for there to be regulations on the amount of capital banks hold.” Explain this statement. ...

Verified Answer:

Deposit insurance means that depositors are safe r...

Question: 15.12

Banks sometimes use what is referred to as regulatory arbitrage to reduce their capital. What do you think this means? ...

Verified Answer:

Regulatory arbitrage involves entering into a tran...

Question: 15.11

Under Basel I, banks do not like lending to highly creditworthy companies and prefer to help them issue debt securities. Why is this? Do you think this changed as a result of Basel II? ...

Verified Answer:

Under Basel I, the capital charged for lending to ...

Question: 15.10

What is the difference between the trading book and the banking book for a bank? A bank currently has a loan of $10 million to a corporate client. At the end of the life of the loan, the client would like to sell debt securities to the bank instead of borrowing. How does this potentially affect the ...

Verified Answer:

The trading book consists of instruments that are ...