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 shift to 'Actual P&L' for backtesting purposes, since 'Hypothetical P&L' is only allowed up through the first 5 exceptions.
- The bank remains in the 'Green Zone' since the exception count still falls under 4% of the full 250-day sample size.
- The bank enters the 'Red Zone,' and its internal model is automatically deemed invalid for regulatory 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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