Basel II.5 required banks to calculate a stressed VaR measure in addition to the current measure. As explained in Chapter 19, this is VaR where calculations are based on the behavior of market variables during a 250-day period of stressed market conditions. To determine the stressed period, banks were required to go back through time searching for a 250-day period that would be particularly difficult for the bank's current portfolio.

Things to Remember

• Stressed VaR is a risk measure that takes into account extreme market conditions or scenarios that may not be captured in normal VaR calculations.
• Basel II.5 introduced the concept of stressed VaR to ensure that banks are adequately prepared for severe market downturns.
• The 250-day period for stressed market conditions is used to capture a longer period of stress and assess the impact on the bank's portfolio.
• Stressed VaR helps banks understand the potential losses they could incur during times of financial crisis or extreme market volatility.