\" We are going to be very strict on the risk management of banks operating in o

Question

"We are going to be very strict on the risk management of banks
operating in our country, and will operate a 99% VaR. If a bank
loses more than its VaR more frequently than 10 days out of
1000, we will close it down!".

Is this a reasonable attitude?

8. You have been asked to advise the Governor of the Central Bank of
Tinpotamia, who has been quoted as saying:

"We are going to be very strict on the risk management of banks
operating in our country, and will operate a 99% VaR. If a bank
loses more than its VaR more frequently than 10 days out of
1000, we will close it down!".

Is this a reasonable attitude?

Yes No

Explanation / Answer

No

If a bank loses more than its VaR more frequently than 10 days out of 1000 all that can be said is that they will not do so very often.

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