Backtesting: Performance of capital requirements for market risk in the BCRA

The Central Bank of Argentina (BCRA) introduced in September of 1996 a capital requirement for market risk. This requirement is calculated according to a standarized formulae set by the BCRA, based on a a Value-at-Risk (VaR) of tghe trading portfolio. This document studies the performance of the local methodology for establishing this requirement by means of a backtesting methodology applied to the trading portfolio of all local banks. According to our results, the standarized method established by the BCRA for fixing capital requirements for market risk understates the amount of capital needed to cover the risk.