The Essentials of Risk Management, Second Edition, 2nd Edition

Appendix 3.4

BASEL 2.5: ENHANCEMENTS TO THE BASEL II FRAMEWORK

During the 2007–2009 crisis a number of banks experienced large losses in their trading books, the risk of which had not been captured in the banks’ VaR models. This pointed to a number of deficiencies in the VaR-based capital methodology, which is typically based on a 99 percent one-day VaR, scaled up to 10 days. The following additional capital charges were therefore imposed:¹

• Stressed value-at-risk. Banks using internal models in the trading book must calculate a stressed value-at-risk based on a 12-month period of significant financial stress. The calculation should be portfolio-specific. This additional capital charge recognizes that traditional VaR calculations capture the ...