Explanation:
The period from 2003 to 2006 was characterized by low volatilities of most market variables. Prior to Basel II.5, banks capital requirements for market risk were primarily based on VaR which was usually relatively low during periods of low volatility, leaving banks undercapitalized for extreme stressed market conditions as seen during the 2007-2008 financial crisis. Therefore, stressed VaR was introduced.
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Q.2349 With the introduction of Basel II.5, the Basel Committee requires banks to calculate the so-called stressed VaR. Stressed VaR was introduced mainly because of:
A
Very high capital requirements because of high volatility of market variables.
B
Too low VaR as a result of low volatility of market variables.
C
Increased capital charges for credit risk.
D
None of the above.
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