Module: | MODULE B: RISK MANAGEMENT
Q363: A commercial bank utilizes an internal Value at Risk (VaR) model for market risk capital computation. Over the previous 250 trading days, backtesting reveals exactly 3 exceptions, placing the model firmly in the Green Zone.
What is the total regulatory VaR scaling multiplier that the central bank will apply to this bank's VaR estimate to determine its minimum capital charge?
✅ Correct Answer: B
The correct answer is B (3.00). Under the Basel market risk framework, banks using the Internal Models Approach (IMA) must calculate their daily capital charge using a minimum base VaR multiplier of 3.0. This multiplier ensures a conservative capital buffer against model inaccuracies and extreme events not captured by the 99% VaR.
If the bank's backtesting results are in the Green Zone (0 to 4 exceptions), the add-on penalty is 0, so the multiplier remains strictly at the base of 3.0. Option A (1.00) is entirely incorrect as it offers no buffer.
Option C (4.00) represents the absolute maximum penalty multiplier applied when a bank is in the Red Zone (Base 3.0 + 1.0 penalty). Option D is an arbitrary number.
If the bank's backtesting results are in the Green Zone (0 to 4 exceptions), the add-on penalty is 0, so the multiplier remains strictly at the base of 3.0. Option A (1.00) is entirely incorrect as it offers no buffer.
Option C (4.00) represents the absolute maximum penalty multiplier applied when a bank is in the Red Zone (Base 3.0 + 1.0 penalty). Option D is an arbitrary number.