Minimum Capital Requirements for Market Risk

For these reasons, the Committee requires banks to develop the capability to perform these tests using both hypothetical and actual trading outcomes. In combination, the two approaches are likely to provide a strong understanding of the relation between calculated risk measures and trading outcomes. The total number of backtesting exceptions for the purpose of the thresholds in [12.9] must be calculated as the maximum of the exceptions generated under hypothetical or actual trading outcomes. Bank-Wide Backtesting Statistical considerations in defining the backtesting zones 16.9 To place the definitions of three zones of the bank-wide backtesting in proper perspective, however, it is useful to examine the probabilities of obtaining various numbers of exceptions under different assumptions about the accuracy of a bank’s risk measurement model. 16.10 Three zones have been delineated and their boundaries chosen in order to balance two types of statistical error: (1) the possibility that an accurate risk model would be classified as inaccurate on the basis of its backtesting result, and (2) the possibility that an inaccurate model would not be classified that way based on its backtesting result.