In conjunction with the internal approach to market risk capital requirements
by Basle Committee on Banking Supervision, 1996
Use of backtesting
REGULATORY TEXTS
This document presents the framework developed by the Basle Committee on Banking Supervision (“the Committee”) for incorporating backtesting into the internal models approach to market risk capital requirements. It represents an elaboration of Part B.4 (j) of the Amendment to the Capital Accord, which is being released simultaneously.
Many banks that have adopted an internal model-based approach to market risk measurement routinely compare daily profits and losses with model-generated risk measures to gauge the quality and accuracy of their risk measurement systems. This process, known as “backtesting”, has been found useful by many institutions as they have developed and introduced their risk measurement models.
