hard · Frm Part 2 Market Risk
A bank's backtesting of its 99% VaR model over 250 days reveals 8 exceptions.
Under the Basel Traffic Light regime, which of the following is the most likely regulatory consequence?
- The bank must switch to using 'Actual P&L' for backtesting, as 'Hypothetical P&L' is only permitted for the first 5 exceptions.
- The bank remains in the 'Green Zone' because the number of exceptions is less than 4% of the sample size.
- The bank enters the 'Red Zone', and the model is automatically deemed invalid for capital purposes.
- The bank enters the 'Yellow Zone', and the supervisor will likely increase the multiplication factor on the VaR-based capital charge.
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