1. You are a bank examiner and you need to determine the 100-day Value at Risk f
ID: 2739993 • Letter: 1
Question
1. You are a bank examiner and you need to determine the 100-day Value at Risk for a bank with a 99% confidence level (i.e. the lowest 1% of distribution of daily changes). You discovered that the standard deviation of the daily change in asset value is $500,000. You also know that the number of standard deviations below the mean that will give the 1% value is 2.33. What is the 100-day Value at Risk for this bank and what does that number mean?
2. Discuss the Federal regulation of banks from the 1970s through the 1990s.
3. How does/can a bank finance or fund its operations (what is on the right hand side of the balance sheet)? Provide as many sources as possible that exist. Please list them down the page as they would show up on the balance sheet.
Explanation / Answer
1) We know that one day standard deviation of change in asset value is is $500,000. However if we want to estimate the change in value for 99% confidence interval we need to multiply with 2.33 and this signifies that we can say with 99% accuracy that the value may vary maximum by 2.33*500,000 = $1,155,000.
The bank examiner wants to estimate it for 100 days. Value at risk increases with the increases with the time period directly proportional to the square root of the time period, which means if we know the VAR for one day, it will be Sqrt(100) *VAR(one day) for 100 days.
Therefore the VAR in this example is $11,550,000. This means that the value at the bank can vary by a $11.55 million in 100 days and we can predict this with 99% accuracy.
3) Banks fina
Commercial bank uses various categories of sources to raise the funds. The major source ofcommercial bank funds are summarized as follows:
Capital
Primary and Secondary capital
Paid-up capital
Reserve fund
Deposit
1. Current deposit
2. Saving deposit
3. Fixed deposit
Borrowings
1. From central bank
2. From interbank market:
i) Interbank depositii) Call money marketiii) Repurchase agreement
3. From international financial institution
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